After the stock market sold off this past Tuesday, it’s time to address a question that I keep getting asked:
Is the market overdue for a correction?
You don’t need to be Sherlock Holmes to figure out what the mainstream financial press wants us to believe.
- Negativity Alert #1: Headlines abound, touting the fact that the S&P 500 index has already doubled from the 2009 lows. Oh, and that’s the quickest double on record since 1936, they add.
- Negativity Alert #2: In addition, Bloomberg reports that over the last 120 days, we’ve enjoyed the fewest 1% pullbacks (14) ever for a market that’s risen by more than 30%.
Based on these stats, the pundits would like us to believe that this bull market is unlike any we’ve ever seen – and is ready for a retreat. But that’s a lie, so don’t buy into it…
Why the Pundits Are Wrong About This Bull Market
If you take time to dig deeper, history indicates that stocks could run higher still. Consider, for example:
- Short-Term Performance: Market historian John Harris identified nine earlier stock market rallies just like this one. Each one lasted over 120 days, with gains between 25% and 35%, and without a 5% dip. The longest lasted 146 days. In almost every case, though, when the streaks finally ended, the bull market didn’t. On average, in fact, stocks went on to rise another 32%.
- Intermediate-Term Performance: Based on the past six months, we’ve seen five other times in history when the market has enjoyed a similarly strong rally. In all five instances, it continued to rally for another year. And by as much 37%, according to Bespoke Investment Group.
- Long-Term Performance: Although the current bull market surpassed the 700-day mark earlier this month, 11 other bull markets have lasted longer. Much longer. In fact, nine of the 11 prior bull markets lasted for more than 1,300 days. Do the math and it’s possible that we’re only a tad more than halfway through this bull market.
- Valuation: Despite the impressive run-up, stocks aren’t grossly overvalued. The S&P 500 trades at a price-to-earnings ratio of 15.7. The long-term average is 15.4 since 1930. Stocks aren’t expensive on a price-to-book ratio (P/B), either. They currently trade at a P/B of 2.2 times, compared to a long-term average of 2.44.
- Presidential Cycles: The S&P 500 has never declined during year three of the presidential cycle. Instead, it rallies by an average of 17%. So with extra emphasis, we’re thankfully in year three of President Obama’s term.
- “Smart” Money vs. “Dumb” Money: Institutional investors (i.e. the “smart” guys) are all about this bull market. The monthly Bank of America/Merrill Lynch Global Fund Manager survey registered its most bullish reading in its 10-year history last week. However, everyday investors (i.e. the “dumb” guys) still haven’t bought into the bullishness. Only 37% of their assets are currently invested in stocks, compared to a historical average above 50%. If you want a clear sign of a top, wait until the “dumb” money pushes all their chips into stocks.
Swap Your Crystal Ball for Trailing Stops if You Want Maximum Profits
So have the markets run too far too fast? Based on history – and not the lopsided media reports – the answer is clearly a resounding, “No.” Stocks could rally much longer.
Notice I said “could.” I’m not saying they definitely “will.” As the mantra goes, “Past performance is no guarantee of future results.”
So consider this a public service announcement.
I don’t want you to get spooked out of stocks prematurely, based on the misinformation being spread by the mainstream press. Doing so means you could be nursing regret – instead of enjoying fatter profits – if this bull market continues like its predecessors.
Or more simply put, forget about the latest crystal ball predictions and start using trailing stops. Then – and only then – can you protect your downside and enjoy the ride as long as it lasts.
Ahead of the tape,