Market Cycles and Where the Bull Stands Today

I’ll never forget a story my uncle told me many years ago about how he ventured into a large field on his dairy farm alone. When a good distance from the fence line he looked up the hill, and in near disbelief saw an angry bull staring at him 100 yards away signaling a charge. Seconds later, knowing he couldn’t win a race to the fence, and with the bull hurling towards him, he had the courage and understanding to run at the bull, which in its own disbelief turned around and sprinted over the hill! That decision gave my uncle the opportunity he was looking for and likely saved his life. It’s critical for investors to realize the stock market is primarily a psychologically driven entity, and that its cyclical peaks and valleys are more accurately measured by investor sentiment than other factors. Famed, late investor, Sir John Templeton, wisely perceived that “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” It’s notable Templeton defined the stages of the market cycle with exclusively psychological terms. What are some reliable measures of market sentiment, where does sentiment stand in the present bull market, and what disciplines can apply this knowledge to your benefit?

Measures of general market sentiment include, but are not limited to:

• The general attitude towards stocks of the people in your own sphere of influence. When normal conversations universally begin turning to the stock market, a cyclical top or bottom likely approaches.
• Widely read newspapers and magazines routinely make highly uncharacteristic predictions about the stock market right before major cyclical turns. Look for claims like, “Will stocks ever go down again?”, or “The stock market is roadkill.”?
• Market-wide cash flows will reveal where uneducated money is being directed, while the COT (Commitment of Traders) Report shows where educated money flows.

This week Stansberry Research revealed that after two years of soaring stock prices, not only are the investing masses not “all in” on stocks, they are buying bonds at ten times the rate of stocks and building cash Money Market positions towards an all-time high.1

Helpful disciplines may include:

• Understand the biggest risk today lies in not owning the types of assets that tend to appreciate in a highly inflationary culture, assets like real estate, high quality stocks, and other hard assets. A Money Fund paying 5% may be the best rate in decades, but it still devours wealth at 2% annually when real inflation is 7%!
• Consider positioning your long-term investments at the high end of your personal risk tolerance level when the major stock indexes are above their respective 200 Daily Moving Averages, and at the low end when they reside below it.?
• Maintain ample cash savings so long-term investments can stay invested and serve their important purpose of building wealth, wealth that in a high inflation society you will likely need in the future.

Knowledge of a 2,000-pound angry beast packed with muscle, coupled with the emotional fortitude to act on that knowledge equipped my uncle to make the right decision at just the right time. God bless your investing efforts as you strive to navigate a market as formidable.

Shaun

“Give a portion to seven and to eight, for you know not what disaster may happen on earth” ~Ecclesiastes 11:2

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1 Stansberry Research, Review of Market Extremes by Brett Eversole, June 12, 2024

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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author.