Panic! Will I Miss The Next Bull Market?

I sense a fair amount of anxiety amongst friends and colleagues that the recent market rise is signaling the start of a new bull market. The concern? They are going to miss it. While anything is indeed possible, I would argue that is an extremely low probability. Let's take a moment here to talk about topping processes. Tops are very, very ugly. They tend to be a rounding process where prices languish in a range for months on end. Sometimes as long as a year or more. The technology bubble in 2000 did not end in a day. Instead prices gravitated around a particular price range for nearly a year. Are there exceptions to this topping process? Sure. 1987 was one such situation where prices literally drove right off of a cliff in terms of valuation then program trading exacerbated a decline which was fast and steep. 1987 was also aided by many external factors which do potentially exist today.

So, are we topping? It appears from my models we are. What does that mean? Well, first off no one is the Oracle of Delphi. But I suspect I can be as ambiguous as she was. It could mean many things. It could simply mean we are taking a break from a prolonged assault to new highs. It could mean a choppy range bound market of plus or minus some percentage moves in either direction. It could mean a reasonable decline of twenty percent or more in the major averages. Or, finally, it could mean a very serious decline and a very serious global economic slowdown in the form of a recession or worse. No one actually knows exactly what will happen but unless you are a buy & hold investor, one must have the discipline to step aside in moments of heightened risk and wait until the storm passes or one has more clarity. Or one must invest in defensive sectors to ride out the storm or a combination of both. Let me remind people that defensive sectors are not high dividend yielding sectors. They are the most basic, mundane and mandatory consumer sectors: food, drink, personal hygiene, etc. Some may include healthcare and have been rewarded in some past cycles. But, in my estimation, the defensive consumer sectors will be severely punished if the economic outcome is severe and there is more than ample precedence for this and more than an ample economic argument as well.

So, given topping is a process rather than a single event, one has to chose a style which they are comfortable with and have the discipline to manage it. If you are afraid of missing the next bull run, maybe you want to rotate into defensive sectors or large capitalization stocks entering the third or fourth year of a bull market and maintain your holdings until more clarity is achieved. Or maybe you want to step aside all together and collect whatever a money market will pay you. But, whatever your methodology is, and you absolutely need one, remember one thing: savvy investors do not have the need to be invested in equities all of the time. They are willing to wait for their opportunities. If you think this is your opportunity, then take it.

I look at the chart below and do not hold that opinion. The chart is the Nasdaq advance/decline line from 1999 through today. The advance/decline line calculation is very simple. Pick an arbitrary date and from that point forward add up all of the advancing stocks and subtract the declining stocks each day. Then plot that point day after day. You can then use a line to connect the dots. If the line is generally rising, the market is healthy. Falling, not so healthy or worse. I have drawn channels around the plot for clarity. We are not in a Nasdaq bull market. Not even close. We are and have been in a bear market since 2000. The world economies cannot and will not lead through innovation, wealth and productivity without the technology laden Nasdaq leading the global stock markets. That is not about to change with a restrictive central banking policy and runaway commodity prices.

Remember, the Nasdaq leadership means innovation, creativity, new advances in business, healthcare, science and the associated wealth are driving the world economy. The Nasdaq lists companies doing business globally or even headquartered globally hence it is a barometer for world wealth and economic health. World wealth is not created by stock markets rising because oil is $75 a barrel. Nor is wealth created when copper is at $3.50 a pound, up from 70 cents. or nickel or platinum or titanium or natural gas or gasoline or or or. I don't need an economist to tell me the global economy is healthy or isn't healthy. They've typically never done a good job of that anyway. They drive their cars looking out the back window. And most spend way too much time managing the data on their knobs and dials and not nearly enough time pondering what economic theory is telling them. In that regard, I am the Oracle of Delphi. I can divine that regardless of what their knobs and dials are telling them, the world economy is not a healthy one. So, will you miss the next bull market?


You may click on the chart for a larger view.