Bull Markets End In Craziness

This is an excerpt from a recent letter to clients from John S. Lyons, president of our parent firm, JLFMI.

In January of 2000, we wrote a Quarterly Report to our clients that began, “If bull markets end in craziness, we’re in the end times”. Without going into all the reasons why we said that, suffice it to say one of the primary reasons was that during the previous year, only 20 of the 500 stocks in the S&P 500 Index accounted for 90% of that index’s 19.5% gain. The market then, as now, was making new highs.

Similar “craziness” is going on now. As the Nasdaq made an all-time new high recently, more than half of its component stocks are in downtrends?? And as the S&P 500 has hit new high, only one of the eleven sectors of that index accompanied it to record territory. Clearly, this 10-year-old bull market is getting a bit crazy!

Now on the other side of the coin, the sentiment of the average investor is not rampantly bullish as one normally sees at market tops. Additionally, in general, there is tons of cash out there. For example, assets in money-market funds have grown by $1 trillion over the past three years to their highest level in around a decade, according to Lipper data. Concerns over a potential recession as well as the fits and starts of trade negotiations with China have been and are a reason some are becoming more defensive and storing up more cash.

So, what’s an investor to make of all this – and importantly, what action if any should be taken? Well first of all, even if the market is acting a bit nuts right now, it could continue that way for some time. After our “end-times” pronouncement in 2000, the market continued to perform quite well until the following September when it finally embarked on a 45% decline. What we do recommend and do so rather strongly is that you refrain from being overly-enchanted with the new highs and have some kind of “escape plan” for such time that the bull market is over – and it will end. They all end of course and with disastrous consequences to the unprepared — and that includes almost all investors.

In April 2000 letter to clients, 3 months after the one referred to above, we take great issue with the brainwashing that investors are subjected to by the mainstream financial industry demanding that investors just buy and hold. That advice is #1 to the financial benefit of those who offer it and #2 easy for investors to believe especially after a 10 year-bull market. The problem is that investors don’t stop believing that advice until they are in the midst or even near the end of 45% declines.

While no risk-avoiding model is perfect, nor can they be, our Risk Model has signaled problems prior to every significant bear market since its inception in 1978. There are certainly times where that market ignores the risk that the Model is showing and continues on up. That may be the price paid for a warning system that otherwise thwarts disaster. We certainly think so.

– John S. Lyons

President, JLFMI

 

What does our Risk Model say now? And what is our escape plan? We invite you to check out The Lyons Share, a daily “all-access” pass to our research and investment moves. Given what is shaping up as perhaps the most volatile and opportunistic market juncture of the past decade – across all asset classes – there has never been a better time to reap the benefits of our risk-managed approach. Furthermore, TLS will be holding its biggest sale of the year (the Black Friday Sale) shortly. If you’d like to get an early bird jump on the sale, email us at info@jlfmi.com and we’ll be happy to accommodate you. Thanks for reading!

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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.