Sunday, April 26, 2009

Market Crash Coming?

I feel uneasy to talk about this, since I always advocate investing for the long term and be in diversified investments while ignoring the noise.  However, I have been slowly selling my stocks in my taxable investment account and I would really feel bad if I did not say anything and what I predict really happened.  So here goes.  I’m selling because:

  • The stock market has been on an huge upswing lately, so it’s a good time for me reduce my risk as I’m planning to buy a house within 1-2 years.  While I firmly believe that the stock market is always the best possible investment when the time horizon is 10+ years, it could be very volatile in the short run and I don’t need the stress because I want to buy a house no matter what happens to the S&P 500.
  • The other, which is the main reason why I’m scaling out, is because I feel that the market is potentially going to go way down.  Everyone these days are feeling better about the housing market, and in turn the stock market.  Unfortunately, the mid to upper housing market in Southern California is on the verge of a huge crash due to the flood of foreclosures that are coming.

    Some of you may know that the local and federal governments have put out memorandums to delay foreclosures in September of last year but as those ended in January, notices of default went out to the market during the first quarter of this year in record numbers.  Since foreclosures usually come onto the market around seven months after a notice is sent, it means the troubled house listings will flood the market starting July of 2009.  (For a more complete analysis and proof with actual data, go here where you will see a chart that shows notices of default going way down during September to December of 2008) More supply, lower prices.  Lower prices, more problems.  More problems, lower stock prices.

    Note that I have no idea what the real situation is nationwide, and a local problem may not be bad enough for the stock market to react badly. I’m not a stock market expert nor a housing expert, so I don’t have sufficient knowledge to predict how exactly this affects the banking sector and the economy as a whole. I just know that this can’t be “good” news, and I don’t want this possible downturn to negatively affect my lifestyle. Therefore, I am selling.

    Also note that it’s almost impossible to predict short term behavior of stock prices, so the market can go up for a long time (some say the S&P 500 could get up to 1,000 by year end, a 20% increase following the 30% run during March and April) even if there is a problem waiting to happen. I just want to give you more information and what I’m doing, so you can decide for yourself.

There. I said it. Please be reminded that this is not advice. I just you to know what may be coming before you hit “buy” (a house or a stock). Good luck and may your choice turn out to work out for you.

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