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Kelley School of Business B.S Finance Equity Capital Markets / Behavioral Finance
  • Bull Market, Bear Confidence 0 comments
    Jun 5, 2014 11:36 PM | about stocks: SPY

    This bull market won't last much longer.

    This seems to be a favorite topic of many columnists and investors in the past few months. Usually, it serves as the beginning of an article or conversation with the ultimate point of warning about the dangers of investing in a bull market of 5 years going on 6. This type of thought revolves around a few common rational points. One of these is that this bull market is on its way to one of the longest by duration, and that average bull markets tend not to last not so long. The investor should be wary, because historically speaking the chances of this bull market seeing a 6th birthday is slim. You might also hear investors appealing to the concept of mean reversion. With high returns last year of a 30% and 26%, it would seem the DJIA and S&P 500 are ripe to come back down to earth. These arguments are both valid and intuitive. Even Nobel Prize winner Robert Shiller expressed concerns about the increase in U.S. equity prices in December of last year. However, something else within this popular rhetoric is at work which seems to make an opposite conclusion - this bull market isn't going away.

    As someone who believes that market psychology plays a large role in price movements, this sort of investor beware sentiment that seems to be present in this bull market suggests to me that investors are wary of jumping in with both feet. In this case, some investors may still be sitting on the sidelines, playing conservatively, or even making their exit.

    I do believe that market returns will revert toward their mean eventually. But if last year's returns are supposed to be an example of market participants who are still cautious, what will happen as the nauseating thoughts of the recent depression have a decreasing bearing as a decision making factor for investors? Or what about when they forget about it completely? Confidence returns, more aggressive buying returns, and the market rises. Perhaps there are still good times ahead in this market.

    As an investor who is long the market, I'm much happier to be hearing the experts saying "the bull market is coming to a close" as opposed to "Dow 40,000".

    Disclosure: I am long SPY.

    Stocks: SPY
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