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Are We In The 3rd (And Final) Stage Of The Bull Market?
Submitted by Lance Roberts of STA Wealth Management,
Throughout human history the emotions of "fear" and "greed" have influenced market dynamics. From soaring bull markets to crashing bear markets, tulip bubbles to the South Sea, railroads to technology; the emotions of greed, fear, panic, hope and despair have remained a constant driver of investor behavior. The chart below shows the investor psychology cycle overlaid against the S&P 500.
With the current bull market now stretching into its fifth year; it seems appropriate to review the three very distinct phases of historical bull market cycles. While I am not suggesting that the current bull market cycle is set to end tomorrow; I am suggesting that we take a pause to question mainstream beliefs.
Phase 1) “What bull market? The fall is right around the corner”
Following a massive, mean reverting, correction - markets tend to bottom and begin an initial recovery. Most individuals have been crushed by the previous market decline and only recently “panicked sold” into cash.
There are many signs during the initial phase that a new bullish uptrend has started. Money flows from defensive names in order to chase higher yield, market breadth is improving, and volatility declines substantially.
However, despite those indications, many individuals do not believe that the rally is real. They use the rally to sell into cash and angrily leave the markets or continue to stay in cash expecting another failure.
Note: The fastest price appreciation in the market happens during the first and third stages of the bull market.
2) Acceptance stage
During the second phase individuals gradually warm up to the idea that the markets have indeed bottomed the psychology changes to one of acceptance. At this point, the market is generally considered “innocent until proven guilty.“
The overall psychology remains very cautionary during this second phase. Investors react very negatively any short term market correction believing the bull market just ended. They continue to remain underweight equities and overweight defensive positions and cash.
During the second phase stocks continue to climb higher and market corrections are short-lived. It is between second and third phases that a deeper market pullback occurs. This pullback tests the resilience of the rally, shakes weak hands out of the market and allows for new bases to be formed. This deeper pullback is used as a buying opportunity by institutions, which missed the initial stages of the rally, and their buying continues to push the markets to new highs.
3) Everything will go up forever
During the first phase, most individuals remain skeptical of a market that has just gone through a high-correlation, mean-reverting correction. It is at this point that most investors are unwilling to see the positive change in market dynamics.
In phase two, however, investors gradually turn bullish for the simple reason that prices have been steadily rising for some time. Analysts and strategists are also turning universally "bullish" in an attempt to manage their career risk and attract investor dollars.
In the final phase of the bull market, market participants become ecstatic. This euphoria is driven by continually rising prices but a belief that the markets have become a "no risk opportunity.” Fundamental arguments are generally dismissed as "this time is different." The media chastises anyone who contradicts the bullish view, bad news is ignored, and everything seems easy. The future looks "rosy" and complacency takes over proper due diligence. During the third phase there is a near complete rotation out of “safety” and into “risk.” Previously cautious investors dump conservative advice, and holdings, for last year’s hot “hand” and picks.
The chart below shows these three phases of the bull market over the past three market cycles.
It is necessary to remember what was being said during the third phase of the previous two bull market cycles.
- Low inflation supports higher valuations
- Valuation based on forward estimates shows stocks are cheap.
- Low interest rates suggests that stocks can go higher.
- Nothing can stop this market from going higher.
- There is no risk of a recession on the horizon.
- Markets always climb a wall of worry.
- "This time is different than last time."
- This market is not anything like (name your previous correction year.)
Well, you get the idea.
Things That Make You Go Hmmm?
Of course, just by looking at a price chart, it is difficult to state that we have definitively entered into the third phase of the bull market. However, there are a couple of data points that go to support this premise. If we reflect on investor psychology it is evident that individuals have generally done the opposite of what they should. Individuals have, more often than not, bought into market peaks and sold market bottoms as the "emotional panic" to get in, or out, has taken control over logic.
The chart below shows the flows of funds into and out of equity based mutual funds as tracked by ICI.
What is clearly evident is that investors, four years after the bull market started, are finally buying into the equity market. This behavior has historically been associated with both short-term market peaks and major market tops.
The magnitude of the rotation into equity based funds by retail investors suggests some caution about the current market environment.
Secondly, margin debt and specifically net credit balances of brokers as reported by the NYSE should at least warrant some consideration. When investors are extremely bullish, and pushing the edges of speculation, the "risk" of leveraging a portfolio is easily dismissed. The chart below shows the positive and negative net credit balances relative to the peaks and troughs of the S&P 500.
While these are only two data points; they suggest that the risk of a more meaningful reversion is rising. However, it is necessary to note that "reversions" do not occur without a catalyst. What will that catalyst be? I have no idea and nor does anyone else. Things that we are already aware of, like the upcoming debt ceiling debate, are already factored into the market.
It is unknown, unexpected and unanticipated events that strike the crucial blow that begins the market rout. Unfortunately, due to the increased impact of high frequency and program trading, reversions are likely to occur faster than most can adequately respond to. This is the danger that exists today.
Are we in the third phase of a bull market? Most who read this article will immediately say "no." However, those were the utterances made at the peak of every previous bull market cycle. The reality is that, as investors, we should consider the possibility, evaluate the risk and manage accordingly.
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The duration of our "bull market" is not up to investors, confidence, market participant psychology, earnings, growth, or any fundamental issues - it is simply a political decision determined by neither the electorate or elected...the un-elected puppet masters will pull the strings as they see fit and "markets" will appear to dance on cue.
We are in a bullshit market. These charts don't have any bearing. For all we know the real bull market may begin after Yellen takes over.
Exactly, the S&P could double from here and you could draw the exact same charts. The only thing I am reading in the charts is time to get out of paper and into assets. NFLX is not an asset, but many industrials are.
+1 weimar/zimbabwe for US stocks, undoubtedly. especially if the tyler's keep posting these "are stocks about to tumble?!?" posts.
Define "real".
Real is whatever the "new normal" is set forth by the assholes* at the time of uttering the said word
* WallStreetWashingtonDCMediaFederalReserve Complex.
Historically the stock market is prepped for a serious correction.
this time might be different, but I doubt it.
Agreed, with three provisions.
1) just because conditions are ripe does not mean it will occur.
2) even if it occurs it could be months from now.
3) the correction coud be big or small, nobody knows
So would that be the 2014 elections or the 2016 elections?
Lance is a good egg..thanks TD
One of the dumbest posts of the day. Moar, bitchez, sheeple, puppet masters, muppets, BTFATH and blah, blah, blah.
It go boom
What is this "market" that everyone speaks about?
pods
"Market cycles" have been rendered moot by Berstanky.
this is the prevailing sentiment. just as the writer was suggesting. ie, "this time is different because...." and everyone says Fed/Ben.
As stawks and commodities go higher, the same amount of QE buys less of it. This is common sense. You reduce or cut off QE, the balloon quickly falls back to Earth.
By the time the Fed stops QE, there will be so much money in the economy that every asset class will be higher than it was five years ago. And I imagine stocks and commodities will continue to rise until for some time after the taper ends. My question is how long does it take for across-the-board inflation really dig in and start to damage the economy. And not reported/faked CPI numbers..."real" inflation.
I agree on stocks and bonds, but NOT commodities. Look at the CRB, it's going lower. Which to me is more proof there is NOT any economy in the world growing.
My question is this. Is there any catalyst that can trump the Fed? Has there ever been any precedence to this? Seems to me the Fed can "print" any catalyst into oblivion!
I agree: the Fed is a force unlike any other in the financial world. Whether you agree or disagree with their policies (or the validity of their existence), to ignore them is folly.
As for the CRB...I see you are right. But I sincerely doubt commodity prices will remain low for long...it seems improbable given what the Fed is doing.
losing reserve status.
When the whole world turns on us, you could call that a catalyst. We're seeing signs.
Gamer,
gotta say I respectfully disagree...the moment the Fed stops pumping ever more QE into the system, it immediately begins it's implosion. Quite simply the massive debts would all begin to re-set to real market interest rates which would simply be an all out demolition of everything interest rate sensitive (corporations who have been given ever cheaper loans for 34yrs...Federal, state, muni's all given ever lower interest costs...auto industry, homes, on and on and on). This would restart the deleveraging of all those plus wall street and detonating the derivatives market. Daisy chain stuff. True in America, true in Japan, true in Spain, Italy, Greece.
This is why the CB's and Fed cannot stop even if they know this won't work long term, even if they know this will not garner any true economic "growth"... they've determined better to live a little longer than allow it to end today.
It seems like the Fed plans to print until things don't show signs of imploding. I mean, they hinted at taper and then complained that rates rose. So clearly their goal is to use QE until rates don't rise as they taper. Plus, the gov't is deficit spending like crazy...so there are plenty of happy gov't workers/contractors making bank right now and buying up everything they can. The Fed is going to run this scam until things change. And by that point, inflation will have made most debts inconsequential.
The whole point is that the Fed will never stop printing because there would be an implosion. The only way this merry go round stops is through crippling inflation - and in that scenario stocks go MUCH higher before imploding
Are you talking about asset price "implosion" or some kind of systemic collapse? Since the gov't is handing trillions out to its workers and contractors every year you've got major housing price inflation in the areas where those people live. Meanwhile, banking deposits are at record levels (maybe those same people saving). Once money velocity increases, I think most people agree that this all ends with double digit inflation. Stocks won't implode in that case...they will explode. And more money will flow back to the gov't via increases taxes. And then the Fed will taper.
But even if this is how it all goes down, it's still pure fraud. Counterfeiting money for paper pushers and NSA types whose claim to fame is that they can bug the German chancellor. And devaluing the dollar because the country pays too much to run it's fraudulent gov't...sigh.
gotta say I struggle w/ the idea that old debt can be inflated away by taking on even more debt now...I get that is how you pay the old debts but seems to only make sense if you were not over-indebted.
Inflation for the over-indebted, interest rate sensitive is not a solution or end game...just another ever shorter kick of the old, beat, worn out can.
Or another way to think about it, any increase in economic activity (say a 3.5% jump in GDP) would increase economic activity by $560 B but the increase in taxes would be @ 20% of that or $110 B…the parallel rising interest rates to say 3.5% would raise interest costs to $600 B…a net deficit increase of $140 B. One step forward economically would create two steps backward budgetarily (hello Reinhart and Rogoff). Now of course the Fed will remit the increase in interest back to the Treasury (+$25 B) but growth actually speeds the budget deficits...not cures them?!?
The "market" has become a policy tool, and the bull market will continue until TPTB decide it's time to pull the rug. Nobody, but a select few will profit from the downside when this thing vaporizes. All other analysis in a centrally planned rigged "market" is garbage.
Which is why I came straight to the comments and skipped over all the useless charts and shit.
Sad to say, but I do pretty much the same thing. Now I just skim analysis, when in the past I would read it twice and if it was a particularly good piece I would read it three times. I used to enjoy this kind of stuff, but now all you have to know is to BTFD, or BTFATH. I hate what the markets have morphed into.
There are no investors left. We've all become speculators.
look at the bright side. You can use the markets with a small portion of your savings to make paper profits which can then be converted into real assets. You just have to hope that by the time it goes boom you got more out of it than you put into it. There must be some kind of scheme that goes by this name.....
But I can't afford anything real with the paper profits because real assets have inflated faster than the markets. I tried to counter this realization by constantly lowering my expectations, but I hit the zero-bound years ago.
"real assets have inflated faster than the markets."
eh?
http://finance.yahoo.com/q/bc?t=1y&s=GLD&l=on&z=l&q=l&c=spy&ql=1
I meant all the *other* real stuff :)
'Speculators'? More like degenerate gambling addicts.
Good move HTARD55 !!!!!!!!!!!!! We are in the final, final stage of the BULLSHIT MARKET. Why bother?
At what point are we going to realize that any history in which markets responded to fundamentals is of no use to us in the current environment?
This 'bull' market has never been that in its true sense, it's been a market that has been driven up by the irresponsibility of the Fed and an unacceptance of natural cycles, which WILL win out in the end.
King Cnut (Canute) sat by the waves to show his sycophantic courtiers that he COULDN'T control the waves and that God was more powerful than he. A shame the Fed and others like them don't realise that.
DavidC
How can this market possibly crash when the fed is backstopping it? I easily expect more QE if it gets dangerous of a crash
How could the patient possibly feel pain when the doctors are there to help? I easily expect increasing dosages of morphine if there is any discomfort.
You got it. Welfare for stock holders will continue until this system crumbles. That welfare, plus corporate welfare for corporations that deal in surveillance, spying, imprisonment and death will be here until the system has crushed everyone and everything else. Welcome to the new version of American exceptionalism!
Correct, do not short. Ever.
Looks like a giant, terminal expanding wedge. Ruh Roh.
Remember that casino gains are not "real" until you cash out. Easy come, easy go.
The Craps table is loaded and everyone is pressing their bets cuz their is a hot shooter (bernank) and he will never roll a 7 again. You'd have to be a fool to take your chips off the table at this time. Winners all around.
Even then the currency you will be holding is depreciating in value by the second against hard assets.
I dont' know, are we??? The question as to wether we are at the end of the bull market has been asked by the bears for the past 5+years and each time they act they get their heads handed to them on a platter.
There is no limit to QE, the Fed/Treasury creates money out of thin air...it is as plentiful as oxygen.
As long as the Fed abd government keep expanding debt it's risk-on.
No debt ceiling or spending limits currently. Not until one is established again.
Obama had his way, a credit card with no limit currently.
Debt exceeding $20 trillion by 2015.
http://www.usdebtclock.org/
http://www.etfguide.com/commentary/1138/Will-U.S.-Public-Debt-Reach-$22-Trillion-by-Feb.-2014/
Some are arguing a lot sooner than that.
I have a system. Whenever I want a fund or stock price to turn lower, I buy it. It's bulletproof!
I hear ya. Same here.
When I bought some Gold and Silver mining stocks a few years back, pretty soon thereafter they started going lower. Want to see Gold and Silver mining stocks go higher? If I capitulate and sell mine, that is the moment when Gold and Silver mining stocks will start marching significantly higher!
The bullion itself is different imo. I won't ever be selling my Gold and Silver bullion. I'll be spending it!
Tough part is "sitting tight". I'm always right, dammit.
Hussman considers a melt-up. Rosenberg turns constructive. But none of that means it will end because capital is being herded by the Fed.
Well, even IF America can get their shit together and print even more and more, so the stock market goes up;
People are forgetting Europe, Asian and South America. It's not all about the US, If the Chinese or European market tank severely due to their own problems so will the US Market - they can print on and on and on... It won't matter - We know everything is in bad shape.
In every big economic country there are severe problems by now - let pop one, and the orther will follow.
For Bernanke, Yellen, Evans, Dudley and Fisher it's about debt to infinity.
Presently there isn't a debt ceiling.
"For Bernanke, Yellen, Evans, Dudley and Fisher it's about debt to infinity.
Presently there isn't a debt ceiling."
There has never ever really been a debt ceiling. Every time they hit it, they raise it.
The bull market will never end as long as zerohedge exists. It is like matter and anti-matter. Yin and Yang. Tyler - tear down this wall!
Roberts does not take into consideration the Fed's money printing, which does not fit into historical analysis and that nullifies any attempt to apply precedent.
Just think about an actual bubble. You know it is going to pop but you have no idea exactly when. Would you bet your wealth on the timing?
When the market beanstalk only talks to the gawk of CB pumping and never to the sun of chlorophyllian growth, he is in for a surprise that even Mises of miserly gold bug jitterbugging said : its only a question of now or later.
The Chinese foolishly think they can surpass the United States as the dominant financial superpower. They even foolishly are shopping around the world to lock in real resources like gold and oil. But in the financial world the Fed and its big bank henchmen can control the entire planet through unlimited creation of paper assets of any traded commodity, stock or debt product. If the big banks need more free money to do that manipulation, they just give a Yell(in) to the Fed. China has not learned that it must also control the 'freely' traded markets in order to gain pre-eminence in the world financial markets. The real reason the markets fear the taper is that it removes the big bank's ability to manipulate everything.
The US does not operate in a vacuum.
DavidC
CRAZY SHIT a peeny stock FANNIE just dropped from 2.65 to 1.90 in 10 seconds
probably not.
Let's look back when we are in the fourth stage.
"In phase two, however, investors gradually turn bullish for the simple reason that prices have been steadily rising for some time."
How does one turn bullish on a market that is based on financial fraud?
How do Bermie Madoff's clients feel today? At one time they felt great, during the grand illusion. DOW 15 or 16 or 17 thousand should feel great, but it is a grand illusion, whether it will be that the market will crash or the value of the money in the market will crash. The Venezuala market is up 300% this year, but what does the money buy?
+55
99 out of a hundred Americans do not know the difference between real and nominal numbers. Hell, no one on CNBC does either.
"99 out of a hundred Americans do not know the difference between real and nominal numbers. Hell, no one on CNBC does either."
Nominal numbers are mostly what 99% ever get to see by way of the news media. It is difficult to know the difference when one is never shown the difference.
Re: It is difficult to know the difference when one is never shown the difference.
It wouldn't matter. The guy in the cube next to me, who is learning options from another guy down the way, thinks that Apply hired the CEO of Blackberry.
Markets have always existed to move money from the dumbasses to the smart-n-savvy people. Markets are how the smart-n-savvy people win. Only the semi-autistic and the "children" think markets are fair.
Bert, a massive man, appears.
we are early in the curve of the hockey stick ... overlay zimbabwe stock market with SPX ... should give you a better idea of where in the bull market we are at.
As long as the FED keeps balancing for the lack of private debt, the markets will remain bullish.
From an abstract point of view the FED replaces profits by printed money. It keeps the 'reallocation of wealth'-machine running.
The 'real' economy is in deflation mode. Wait for this deflation to gain speed. The FED will have to speed up the printing presses at an ever increasing pace. At some point even the dumbest guy will realize that the SHTF.
Once that happens, there will be no profit taking from shorts or whatsoever. The FED is using its ulitmate weapon atm. There is no way to avoid or fight the coming crash without some kind of monetary reform.
FEMA already prepared accordingly. What about you?
Lance, I think it would have been more appropriate to title this piece "are we in the third and final fed induced bull market". This ramp up is going to tumble just like the other fed induced rallies. It amazes me that anybody could refer to this market any other way and the sad thing is that there is only 1 way out of this mess. We will have another major financial meltdown wherein the Fed and our thieving leaders in Washington allow the market to clear, thus expunging all the miss-allocated, non performing debt. Otherwise our economy will keep wandering around like the zombie it has become.
Re: Otherwise our economy will keep wandering around like the zombie it has become.
If a society is based on con-artists screwing dumbasses why would anything but a bubble based economy be "normal".
People on this site want to return to a "normal market". But, what's "normal" in a survival-of-the-fittest society?
"What is clearly evident is that investors, four years after the bull market started, are finally buying into the equity market."
How is it that people never learn?
Re: How is it that people never learn?
How is it that people think people could ever learn anything?
The markets have always been a function of: optimism, the prostate gland, available money, & debt.
Debt is a function of: optimism, the prostate gland, & The Fed.
So, the market = 2 parts optimism, 2 parts prostate gland, available money, & The Fed.
Place all ingredients into a cocktail shaker, serve up or with a Hindenburg Omen twist.
I wonder what charts would like without any QE?
I am confident you wouldnt have a chance to check the charts if there was no QEx.
There are no markets anymore - what you see on the stage are dead, rotting markets with some (hard to see) strings on it. These dead markets are dancing string puppets controlled by the FED. Once the strings are cut they will stop dancing immediately.
Dont you smell the decay scent already?
And we see today that QE will be increased.
When the Fed whips the bull it runs.
When the Fed feeds the bear it is sure to come.
We all know every market is rigged, so it's really as simple as that.
I'll go short the day zerohedge goes bullish.
The only way this ends is through crippling inflation. The kind of inflation that actually wakes people up (things going up in price 10-20% a month). And in that scenario stocks go much, much higher before imploding
I guess it can just go on like this forever ...
Until (prob not for years if ever) the Fed starts taking the foot off of the gas, the best investing strategy is to wait for each "crisis" - Greece, sequester, debt ceiling, Syria - and let the S&P daily hit the lower Bollinger Band and then buy as many out of the money calls as you can in the next month. If you did that just this year you would be a multi-millionaire
The Fed will keep pedal to the metal until the engine blows up. When it finally goes, the collapse will be so fast that no one will get out.
The graph is missing the "Loathing" period after the "fear" downdraft. It should be a box that goes across the bottom from about 2008 to present.
"Good god man pull yourself together!"
The second, and I do mean "the second", they stop printing money and stop intervening, this turkey is going through the floor. The problem with it all is that it is a human decision now. Eventually, someone will decide they will get more personal gain from knocking it all down again.