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Last week, a few incidents in Europe and the concerns about earnings and valuations of the U.S. stock market spooked investors. The reaction was healthy for a market that has enjoyed the kind of success seen in stocks over the last few years, but so much of the doomsday story was a rehash of things that were supposed to happen a long time ago. Granted, if you think the Dow Jones Industrial Average is overvalued at 6,600, it stands to reason, one would feel that way at 17,000.

Nevertheless, as the market moves higher, the valuation proposition must improve as well; considering the massive increase in the market over the last few years, there is huge pressure on stocks to prove they deserve current valuations and augur for even higher valuations. However, let's keep in mind that whenever someone uses the March 2009 low as "fair value" for stocks, they simply are not being realistic. In fact, you are talking or listening to a die-in-the-wool bear or someone that allows politics and emotions to overrule common sense.

However, the same could be said at current levels for bulls, unless fundamentals continue to improve.

Of course, I am all about finding individual names with upside potential based on a variety of factors, so discussions about "the market" should be put in the proper light. When too many stocks are overvalued, along with pullbacks, even the great names will take hits, too. However, those same great names will be among the first to rebound. If you are a long-term investor, getting caught panicking during a short-term pullback is a dangerous position. There are Challenges:

Macro

• U.S. economy has to pick up speed looking for 2H14 GDP, above 4%
• Emerging markets shake-off growing pains
• Global hotspots come under control

 
Individual Holdings

•  Take market share
•  Expand margins
•  Global growth

Listening to Carl Icahn has cost investors untold profits since the rally began. Yes, one day he will be "right," along with everyone else preaching caution or catastrophe, but considering his stature, it seems so reckless. Being right will not make up for lost time and lost profits, even if there were a worst-case scenario, it is unlikely investors haven't banked some post-crash profits.

-Carl Icahn's Greatest Hits

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Carl Icahn says 'time to be cautious' on U.S. stocks

                                                                                                          Reuters/July 10, 2014

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"In my mind, it is time to be cautious about the U.S. stock markets...while we are having a great year, I am being selective about the companies I purchase."

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Icahn warns stock market could face 'big drop'

 Reuters/November 18, 2013

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"I am very cautious on equities today. This market could easily have a big drop," Icahn said.  "Very simplistically put, a lot of the earnings are a mirage, they are not coming because the companies are well run but because of low interest rates."

 

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Icahn warns another downturn may lie ahead

Financial Times/March 11, 2011

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Carl Icahn has joined the growing chorus of prominent investors warning that another downturn may lie ahead.  “You’ve got to be myopic if you’re not at least concerned that there might be a major correction,” the veteran corporate raider told the Financial Times.

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Icahn Says 2nd Downturn Could Cause ‘Bloodbath’

Dealbook/October 9, 2009

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Carl C. Icahn, the billionaire investor, warned Friday of the potential for a second economic downturn that could cause serious pain for investors. "If you get a double-dip recession and they start coming down, it's going to be a bit of a bloodbath," Despite the months-long stock market rally, Mr. Icahn took a generally cautious tone in Friday's interview. He did say he sees an investing opportunity in real estate - an opportunity to sell it short, that is.

Bottom Line

Everyone has an opinion. However, what drives those opinions change from history, knowledge, intentions, and desires. Motivations are critical as well. Investors should always be cautious and vigilant; trying to invest based on a crash is impossible. We can adjust risk, but you cannot be completely in and out at the same time.

Today's Investing Lesson

How to avoid a set-up...

Lumber Liquidators is a name I know very well. I have recommended the stock six times since 2007, and have made money each time; the last position, we closed in March at $104. So, as the stock has been in free fall mode, I have been spying closely of possibly getting back in.

I am sure I was not the only person looking to jump in the stock. I think a lot of people were sucked in this week and were deliberately duped. Somehow, a rumor floated Tuesday that Lowe's was ready to pay $100 for the stock, sending the shares higher on big volume increase. The rumors were flying high with one message board saying that LL was worth three times a $100 bid.

Before last Tuesday, LL traded an average 550,000 shares per session that changed dramatically last week.

Lumber Liquidators	Closing Price & Change	Volume
July 8	$76.59 +$2.39	2,000,000
July 9	$70.42 -$6.17	6,300,000
July 10	$55.25 -$15.17	10,400,000

I think someone knew the company was going to post a loss, and the rumor mill generated enough activity to sell a large position. Last Tuesday, they were able to dump shares into buying, masking their agenda and risk. On Wednesday, the sellers could not wait any longer and simply dumped as fast as possible. By Thursday, the stock was an unmitigated disaster and a lot of people looking for the edge and quick buck were crushed.

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