Business & Investment

Opinion: Why don’t you know it when the bear market starts

Fourteen years ago this week, on October 9, 2007, the stock market hit a bull market high before the bear market triggered by the financial crisis began.

I’m sure the last thing in your mind that day was whether a new bear market had begun. Instead, you definitely shared the vibrancy associated with yet another new bull market high. S & P 500
SPX,
-0.19%

It was 120% higher than where it stood at the beginning of the bull market five years ago.

And yet, one of the worst bear markets in US history began on that very day. The S & P 500 for the next 16 months lose 55%.

This walkdown memory lane is important because it helps remind us that the top of the bull market is not recognized in real time. It was after the fact that it became clear that the bull market was over.

Many clients strongly opposed me to this, arguing that it was certainly sensible that the bull market reached the top in October 2007. But they are arguably rewriting history. This is understandable. It is human nature to rewrite the past and reveal that the event unfolds as it really is.

However, the beginning of the bear market from 2007 to 2009 was not clear at this time.

If in doubt, consider the average recommended stock exposure for a subset of the nearly 100 short-term stock market timers that my company monitors daily. (This average is represented by the Hulbert Stock Newsletter Sentiment Index (HSNSI).) On average, HSNSI reaches its highest level on the day the bull market culminates.

This is shown in the attached chart. This averages the HSNSI for the previous 6 weeks and the following 6 weeks for all bull market tops over the last 40 years (according to the calendar maintained by Ned Davis Research). As you can see, HSNSI rose 20 percentage points in the last 6 weeks of the average bull market and then plummeted 40 percentage points in the first 6 weeks of the bear market.

In other words, professional market timers are, on average, the most optimistic on what should be the most pessimistic. They are experts who follow the market every day, all day long. What do you think you can do if they can’t do better?

Market timer comment

I think these statistics will be a compelling case. But to add anecdotal icing to your cake, consider a representative sampling of comments made by newsletter editors on the exact day or just before the market top in October 2007.

  • “If you listen carefully, you’ll hear a rumbling sound. That roar is the distant thunder of the third phase of this great bull market … I see good times rolling, I really do. ”

  • “It’s been a while since we were so confident that our serious money could make a big profit, so it’s imperative to put money in it if you haven’t done so already. [stock] Bring to market as soon as possible. No one is waiting for time, and your money is waiting for you. So go for it. ”

  • “Not only is the global stock market continuing, but … it’s also in a strong phase … Now that the Fed has waved the flag that interest rates are falling, there’s nothing blocking the market.”

  • “Dow 16,000 is here … [I]The stock market does not appear to be competing for the next 3-6 months. ” [The Dow on the day of the October 2007 bull market top was 14,165.]

  • “There is no risk of a periodic bear market decline of more than 20% on the radar screen.”

  • “The long-term bull market is intact … you should be looking to buy any weaknesses.”

Their liveliness is obvious, isn’t it? And no matter what you’re talking to yourself today, it’s overwhelmingly possible that you felt that way that day.

Investment lesson

The impact on investment is clear. Don’t expect to reduce your equity exposure to avoid the bear market.

That’s why you need to devise and follow a strategy that allows you to live through the bear market. If you invest 100% in the bull market until the exact day of the top of the S & P 500 and then move to 100% cash during that period, you will not be able to make as much money as the theoretical maximum. Of the bear market. But in the real world, no one has achieved that theoretical maximum.

In other words, perfection is the enemy of goodness.

By the way, I don’t know if the bear market has started. More than a month has passed since the S & P 500 hit a previous bull market high and is now trading nearly 3% below that high.

But even if it does, we don’t know when the market will drop significantly, months from now.

Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a flat rate to be audited.He can reach at mark@hulbertratings.com..

Opinion: Why don’t you know it when the bear market starts

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