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Technically Speaking: The Death Of Bull Markets

The big question for investors at the moment is whether the 9-year old bull market has finally come to its inevitable conclusion or is it just a "pause that refreshes?"

While the optimistic "hope" is that this is just a pause within a continuing "bull market" advance, from a money management standpoint, getting the answer "right" is vastly more important to long-term investing outcomes.

The easiest way to approach this analysis is to start with the following basic premise:

"Bull markets are born on pessimism, grow on skepticism, and die on euphoria." - Sir John Templeton

Take a look at the chart below which is Robert Shiller's monthly data back to 1871. The "yellow" triangles show periods of extreme undervaluation while the "red" triangles denote periods of excess valuation.

Not surprisingly, 1901, 1929, 1965, 1999, and 2007 were periods of extreme "euphoria" where "this time is different" was a commonly uttered phrase.

What about today? Is this another period of "euphoria" or are investors still maintaining enough "skepticism" to fuel the bull market further? Unfortunately, there is little evidence investors are "skeptical" of much of anything right now.

"However, for now, there is little doubt the bullish bias exists as individuals continue to hold historically high levels of equity and leverage, chasing yield in the riskiest of areas, and maintaining relatively low levels of cash as shown in the charts below."

But the "euphoria" of individuals is not just solely related to the stock market, but to the whole economy as well. (The chart below is a composite index of the University of Michigan and Census Bureau measures.)

So, why shouldn't there be "euphoria?"

The stock market has been surging for the last 9 years, unemployment claims are at the lowest levels in more than 30 years, and the housing market seems

This article was written by

Lance Roberts profile picture

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a partner at RIA Advisors in Houston, Texas.

The majority of my time is spent analyzing, researching and writing commentary about investing, investor psychology and macro-views of the markets and the economy. My thoughts are not generally mainstream and are often contrarian in nature but I try an use a common sense approach, clear explanations and my “real world” experience in the process.

I am a managing partner of RIA Pro, a weekly subscriber based-newsletter that is distributed to individual and professional investors nationwide. The newsletter covers economic, political and market topics as they relate to your money and life.

I also write a daily blog which is read by thousands nationwide from individuals to professionals at www.realinvestmentadvice.com.

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Comments (26)

Lance's articles are one of the very best on SA. His grafts are top notch and he gets into areas that are often overlooked. He makes a very good case for the bears. But there are two sides to the arguement and too often, as in this case, he almost totally iqnores the bull side.

The present bull market is the second longest in history but it is not even up to average in percentage gain. By that measure it is sub par and has a long way to go. The market has gone up nicely since Trump was elected. I don't agree with him on some matters and find his MO strange at times. But you can't igrore that the results of the changes he has implemented --vast reduction in regulations, tax cuts, etc.--has been a very big reason for these post election gains. Going from having an anti business president to one who is pro business makes a big diffence

The P/E, P/B ratios were higher than normal but with the fall off in the market since early February there has been a contraction in PE's so that now they are more normal, especially when taking interest rates into the equation. The Fed is in the process of a long slow rise in interest rates but they still very low historically. While David Rosenberg adds to the bear case there are many smart people on Wall Street who can make a similar case for the bulls.

I hope that future articles by Lance will also give the other side of the argument. There is always one.
HomerSimpso profile picture
Lance, thanks for this educational and informative article, it provides plenty of food for thought.
S&P 500 likely will go side way on monthly scale for many months to come with the range of 2300 ~ 2850 and this side way action is a consolidation phase which is necessary for the market
to close the big up leg on monthly chart and prepare for the next up leg ...

Bull market will not be over because dollar/rate set up a space for this market to move higher so long there is no recession in next 2~3 years ..
I read all of your artices, and your "exit" logic makes a lot of sense. But still... i hate to exit the market without having a plan for when i'll buy back in. So what are you looking for? That's probably a bigger question for an article unto itself, i'm guessing.
Lance Roberts profile picture
When the time comes, I will write an article for increasing equity exposure. We never exit the market entirely because you can't time markets. However, we do mitigate risk by raising cash and hedging. Between the newsletter and the Tuesday update I try and keep everyone up to date on what we are doing.
How can someone hedge in a retirement account? Don't think i have the ability to buy put options. I can buy short ETFs or something like HDGE, but those make me nervous, and never liked or trusted paper gold.
HomerSimpso profile picture
In an IRA or Roth, you should be able to buy puts, you would need to contact your broker to enable that ability. In a 401k, most likely not.
2live4divs profile picture
Thank you for your timely article!
alacer profile picture
Since every decision in life is based on old and incomplete information and everything is always changing, the best next move is always a guess. There is no need to bias this fundamental uncertainty and neutrality is the best stance because it offers maximum flexibility.

What is "the" market? Surely it's an oversimplification to think it's the S&P 500 - just 500 equities of most large companies out of thousands of assets and derivatives including stocks, ETNs, ETFs, mutual funds, CEFs, bonds, options, futures and currency pairs. There are many markets and it's surprising they aren't better connected internationally. For example, how can I in the USA buy Stillfront Group AB's stock SF:FN as easily as AAPL? No simple way to buy this Swedish stock, because it trades in a market that's effectively separate from those readily available to me. Yet this market is connected to others through forex and retail channels.

As a dividend investor primarily, the market I favour doesn't include anything in the S&P 500 and is already a bear. But that doesn't matter if the aim is reliable and high (>8%) dividends and maybe even bearish is better, because the lower the price the higher the yield percent. In bear markets it's easier to find undervalued stocks. Examples of this are NRZ that's currently undervalued on price by 48% (using a DCF model to forecast future cash flow value) and has a 12.29% dividend yield and ARI that's currently undervalued on price by 38% and has a 10.32% dividend yield. With dividend investing price appreciation is nice, but what matters most is corporate value and dividend appreciation, since given those price eventually appreciates.
Technically Speaking: US has been bankrupted...
Sir John died shortly before the last bull market came tumbling down in the fall of 2008 so he wasn't around to see the fuel that made the fire blaze this time around, which is a new tool the Fed has been using since 2009 to stimulate the markets and thereby help (to no small degree I might add) create the current bull market.

That tool is so-called quantitative easing, which is currently being phased out and replaced with quantitative tightening. "Easing" adds liquidity to the markets. "Tightening" reduces it.

The current tightening phase is deliberate and intended to wind down the Fed's bloated balance sheet, which it knows is problematic. The bull market will end as a result. Replaced by a bear market of no small comparison.

Some of the smartest guys on the Street are predicting a 60% decline in the broad market averages. In particular the Dow which is the most overheated, followed by the S&P, and subsequently the NASDAQ, all of which are grossly over-valued by any historic or statistical measure.

When Warren Buffett recently reminded Berkshire Hathaway shareholders that the stock of BH had given up 50% or more of its share price during each of the previous market reversals dating back to 1987, he was sending a message to every mom and pop investor on Main Street, warning them of what is to come...it is a message that only fools will ignore.
Buyandhold 2012 profile picture
"...only 8% of the time In the past has the stock market in the United States been as richly priced as it is today."

I've been saying for years that the stock market is overpriced.

Investors should be extremely careful. They should make sure that they are not overpaying for stocks that they are buying today.
airlarr profile picture
Lance, very good analysis except that there is no consideration of global markets, global economy. I'm sure you're aware that finally we see some good economic data around the world, and improving stock markets. Also your valuation data ignores interest rates, which are rising but remain well below historic levels. Will rates continue to rise? Perhaps, but rates globally are well below those here, which is likely to keep our fixed income rates constrained.
All in all, the bull case is in tact, at least, until the economic and stock market data tell us otherwise.
Lance Roberts profile picture
That economic growth spurt is also waning as liquidity is being withdrawn globally as well.
Lance isn’t telling you what to do he is letting you into the mind of a professional money manager. It is up to each of us to call the bull/bear as we see it. I find his balanced discussion of both sides of the trade incredibly useful and educational. Thank you Lance, for all the work you share!
droubal profile picture
Agreed. Lance provides a great view of how the markets have behaved. He does a great job placing our current market performance, in historical context.
There is a long history of high priced markets not staying that way. Also, high debt levels have a corrosive effect on the economy.
These aren't just opinions, they are history. People that get hostile when they see something they don't like are just rubbing their confirmation bias.
The recent higher volatility was rather expected following 15 months of mindless buying after the last election. All it means is that uncertainty has been reintroduced into the markets and its emotional underpinnings. This is still a somewhat "hated", or "disbelieved" bull market which only got to the point, in February, where it was running short of bull power. Now that stark reality (that is that markets can go down, and rather swiftly) has become an addition to the mainstream thinking of participants, the more things swing in favor of bearish sentiment, the greater the probabilities that a reversal will be very strong. But, if no reversal comes, I like shorting as well as buying if the opportunity arises.
This is the best column on Seeking Alpha.
certainly the most repetitive
This article only proves the value of holding a diversified portfolio and ignoring the buy and sell chatter. 2007 was great - 2009 was a disaster. Yet 2018 the market is up significantly over both those great and disaster levels - unless you were foolish to be in a few selected stocks. Either you believe in the US and invest - or you don't and you stuff your shekels in a mattress. If you have an investing horizon longer than your nose, just ride out the troughs - markets have always come back. That said, after such long bull markets, it's prudent to build a larger cash position in anticipation of the next bear market. In December, after the fatuous "middle class" tax cut (aka tax cut for the rich when 83% goes to the 1%), I went 30% cash, which is my biggest cash position ever. We may see some one-time benefit, but I doubt many of us in the 1% are about to reinvest our tax savings - why would we? World economy is already booming - unemployment near record lows, yet inflation remains low - all points to sufficient inventories already, so no need for further investment.
High Yield Cash Flow profile picture
For those who live by the price, will die by the price. Follow the income and price will take care of itself. Price is an illusion-of-confusion that reacts to fear and greed. Remove that obstacle and your left with one constant, generating income from price. Good luck and hope for more price destruction based on fear so I can pick up the pieces!
He definitely should know about the death of bull markets. He's only called 342 of the last 0 bull market deaths.
Me XMan profile picture
HAHAHA! Too funny. If bulls were dead then why SPX riding high?
69......how about a rebuttal with content. Is that possible at the moment or are you wrist deep in a bag of Cheetos?
My comment WAS my rebuttal -- to not only this article, but also to the hundreds of identical ones preceding it.
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