Last Gasp Of A Bull Market

I would suspect, with investor sentiment extremely negative at that moment, we’ll see a short-term bounce in the market which will again give investors their “buy the dip” confidence back. With so many hedge funds and high net worth investors becoming defensively positioned, we may need a false rally before the market can truly turn down.

I continue to remain cautious. As mentioned last month, value stocks have been a tough place to be. The iShares Core U.S. Growth ETF returned 5.06% in 2015 while the iShares U.S. Value ETF returned a negative 4.13%. This will eventually change as it always does.

In the last stages of a bull market a small number of large momentum stocks prop up the market (think FANG – Facebook, Amazon, Netflix and Google Alphabet), while the rest of market goes into correction territory and fund managers rotate into and out of sectors to try to squeeze better returns.

Once the remaining leading momentum stocks break down, there is no foundation to hold up the market – short of another grand FOMC market intervention (the odds of that happening just flat lined due to the recent strong employment numbers).

While there are always a minority of stocks that will rise when the overall market is declining, going against the trend is rarely a good idea and one of the most difficult things to do. Therefore, I hate to sound like a broken record….but, patience is a virtue. Protect your profits. There is another golden investment opportunity on the horizon. Probably not as soon as we want, but it will eventually come. Let others speculate while we put probabilities on our side.

This is also a good reminder that sometimes market actions take longer to play out than you anticipate. Here are two of my favorite quotes from our March and May 2015 issues warning about U.S. Stock Market Valuations.

Stanley Druckenmiller: “I’m experiencing a very strong sense of déjà vu….I feel more like it was in ’04 when every bone in my body said this is a bad risk/reward, but I can’t figure out how it’s going to end. I just know it’s going to end badly, and a year and a half later we figure out it was housing and subprime. I feel the same way now.”

Mark Cook: “Conditions today remind me of a speech I gave in February 2000 to some traders in New York. I was direct: “You who are in the stock market, get out now — you will get killed.” He further points out that a certain negative set-up has happened only two other times, in March 2000 and December 2007. In each of the following years, the market lost more than 30%.”