Contemplating the Market: Is Now the Time to Sell?
As I mingle with friends and acquaintances during this post-election holiday season, a perennial question arises: “Are we standing at the precipice of a stock market bubble?” The truth is, many investors appear to be on an elusive quest for that elusive “magic indicator” to ascertain precisely when the bull market will flounder. Often, they find themselves taking financial advice from party guests whose qualifications remain shrouded in ambiguity.
In my latest financial tome, “Investment Atlas III – Creating Wealth Using Historical Trends,” I meticulously outline various tools at a stock investor’s disposal—analogous to how physicians employ an arsenal of tests during routine check-ups to assess the well-being of their patients.
Investment Atlas III
With a rich tapestry of experience spanning 33 years—acclaimed for a documented track record as a market strategist and portfolio manager—I rely on an intricate matrix of indicators designed to distill a consensus regarding the market’s overall vitality. Among these, the elusive 40-week moving average of key stock market indices, in tandem with the NYSE Advance/Decline Line (AD Line), has consistently demonstrated its prowess in pinpointing pivotal market peaks throughout history, notably in the years 1929, 1973, 2000, 2007, and 2021.
1929 charts
2007 charts
Understanding the AD Line: A Deep Dive
The AD Line serves as a barometer, measuring the influx of individual stocks gaining traction versus those that succumb to the downward pull on the New York Stock Exchange (NYSE). A distinctive feature of the AD Line is its egalitarian approach; it treats all stocks with equal weighting, in stark contrast to the S&P 500 Index’s method of prioritizing market capitalization. In essence, it offers a unique lens through which to assess market direction, often foreshadowing shifts in momentum months ahead of the S&P 500 or DJIA.
Navigating Through Investment Tools
In the realm of successful investing, understanding the overarching trends in the stock market—the all-important question of when to buy or sell—proves just as crucial as identifying specific assets to invest in.
Technical trend indicators like moving averages and AD lines provide invaluable insights. A cardinal rule among investors is that these indicators should ideally mirror the movement of market prices. When they deviate, moving in opposition to the market price and crossing the moving average—a situation termed divergence—the likelihood of a significant market directional shift looms large on the horizon.
Current Market Health: An Optimistic Outlook
When juxtaposing today’s market dynamics with the aforementioned historical peaks, it’s evident that the key indicators continue their upward trajectory, signaling unabated strength and defying any discernible signs of weakness (see accompanying charts below).
2021-24 NYSE AD Line
2021-24 S&P 500 Index (with MA)
Strategies for the Astute Investor
Crafting a wealth-building investment blueprint necessitates both aggressive and defensive strategies.
Investment triumph transcends mere market outperformance; it hinges on a well-disciplined strategy anchored by clear performance goals, rational asset allocation, a robust investment-monitoring mechanism, and a meticulous rebalancing policy for one’s portfolio.
While some advisors rigidly maintain a policy of being 100% invested at all times—often neglecting the broader investment landscape—I contend that the core responsibility of an investment advisor is dual-faceted: to facilitate clients in reaching their investment aspirations during prosperous times and to mitigate losses when the market falters. Astutely discerning when to enter or exit the market can be equally, if not more, vital than knowing what to invest in.
In the same way victories in sports or military endeavors emerge from a meticulously devised strategy—balancing both offense and defense—success in investing similarly necessitates a harmonious blend of the two.
Bear Markets
History unambiguously illustrates that every bull market eventually reaches its conclusion, underscoring the importance of preparing when the tides are favorable. A glance at the sagacious investors of yesteryears reveals a bemused reaction to contemporary strategies that advocate for being fully invested in equities at all times—irrespective of prevailing market conditions.
Embrace the wisdom of financial history and steer clear of its pitfalls!
