Bullmarkets don’t usually end with a bang

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Unlike bear market bottoms, which tend to be short and violent, the top of a bull market in the stock market gradually emerges over time as the peak of the first zone or investment style and then declines. to do this.

That is, investors should not manage their equity portfolio assuming that an exact day will come when it makes sense to invest 100% and then invest in cash. It’s not too difficult to pinpoint the timing of the stock market, but it makes more sense to gradually build up the cash as the individual position reaches its goals.

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Of course, there’s no way of knowing that the current stock market, which ruthlessly retreated from record highs in late September, entered such an extended topping process before Friday’s rally began in October. But if it is not over yet then the bull market will end someday. It is important to look at the characteristics of tops in the past and not manage your portfolio on the assumption that you will win at the top. real time.

A recent example of all sectors and styles not reaching bull market highs at the same time occurred at the peak of the Internet stock bubble in the early 2000s. The S&P 500 and the Nasdaq Composite Index rose higher in the March 2000 bull market, while value stocks, especially smallcap stocks, continued to rally. At the low of the bear market in October 2002, the S&P 500 was 49% lower than its March 2000 high and the Nasdaq Composite Index was down 78%, but the average stock price of small-cap stocks was down 2% compared to March 2000. was expensive. Data from Professor Dartmouth Kenneth French.

30 Bull Market Watch

This is just one example, but it is not unique. Consider what you found when you analyzed 30 bull market tops from the mid-1920s that appeared on a calendar created by Ned Davis Research. In each case, different market segments set the dates when certain bull market highs were reached. Price, growth and mix styles are measured in large, medium and small sectors and stock prices. -Price Book Value Ratio. On average, for all 30 bull market tops, there was a spread of 225 days between the opening and latest dates when any of these sectors reached the top. This is over 7 months.

There are exceptions. Especially when the market collapses due to some external event and almost all the sectors get depressed at once. The stock market crash of 1987 and the 9/11 terrorist attacks and the fall resulting from the pandemic blockade of March 2020 are good examples. However, in most cases it is more accurate to view the top of a bull market as a process rather than an event.

emotion factor

Another reason to consider market topping as a process is that it is unlikely that a bear market is imminent on a day when a wide range of market indices, such as the S&P 500, reach bull market highs. Instead, you’ll probably get caught up in the vibrancy of the moment. Looking back, it is clear that the bear market has started.

This vibrancy prompts investors to invest heavily in equities late in the bull market. Assuming that the exact day of the top has not been hit yet, they tend to stick to their stock positions for too long. Keeping the top of the market as a process allows investors to focus on individual positions rather than the entire market, thus compensating for this volatility.

Many people resist this advice because their memory betrays them and leads them to believe that it is possible to find the top of a bull market when it is happening. This is definitely not the case, as my company keeps track of stock market timer advice on a daily basis. The advisor tells the client how much of the investment portfolio should be in stocks and how much should be cashed. During the last 40 years when the S&P 500 peaked in a bull market, the average recommended stock exposure level for these timers was 65.7%. This is a higher risk level than 95% of all other days in the past 40 years.

Conversely, when the S&P 500 hit bear market lows, the average recommended risk level for stock market timers was only 5%.

memories of 2007

Remember October 2007. The S&P 500 was about to start a 57% decline in 16 months, but none of the nearly 100 stock market timers my company is monitoring had imagined it that way.

This failure also applies to the market timer, which has the best long-term record for the month. One of the top long-term performers at the time told clients that a bear market may be far away and was not even visible on the radar screen. Second, the day before the exact day of the S&P 500 bull market high, the margin moved from full investment to 25% and borrowed to invest in more stocks.

It’s a joke if these long-established market experts think they can consistently do better if they can’t predict when one of the most severe bear markets in US history will begin. By treating the end of a bull market and the beginning of a bear market as one process rather than a single event, you are more likely to be successful.

Hulbert is a columnist whose Hulbert ratings track investment newsletters that pay a uniform rate to be audited. He can be contacted at [email protected]

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Bullmarkets don’t usually end with a bang

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