Don’t believe the bull

Don't believe the bull

This post is from staff writer Richard Barrington.

Have you got bull market fever yet?

Its symptoms are giddiness and a blurring of reality. It happens when the stock market has had such a run of success that investors start to imagine just what kind of riches it would create if that run just kept going.

You can tell bull market fever is going around by the sheer volume of commentators offering theories on why the market is poised to go onward and upward. These are the same voices that were prevalent in the summer of 1987, then again in 1999, and again in 2007.

We all know what happens next. The expert commentators always manage to survive these setbacks — they simply shrug it off and move on to selling their next prediction. The real devastation comes to those normally cautious investors who get lured into taking more risk than they should at precisely the wrong time. Those are the people who need to avoid catching bull market fever.

Now, let’s be clear. I am not predicting the next great bear market. I’m just saying there’s starting to be an awful lot of bull in all the current bull market talk. If you don’t want to get burned, here are six things to watch out for:

  1. This time, it’s different. It’s not that bull markets are created without a rationale — there is generally a convincing-sounding reason why success should not be limited by the normal boundaries this time around. This can be applied to why an individual company should be able to keep expanding beyond its normal saturation rate, or why conventional valuation parameters for the market as a whole should no longer limit the price of stocks. The truth is, it’s always different — no two bull markets play out exactly the same way. For that matter, neither do any two bear markets. Despite the differences unique to each situation, just remember that the fundamental rules of business and economics still apply.
  2. Trust in momentum. One of the most striking symptoms of bull market fever is how much trust people come to place in sheer momentum. This is the believe that a stock’s earnings will grow at 20 percent this year because they grew at 20 percent last year, or that stock prices will go up by 15 percent this year because that’s what they did the year before. With stocks, it’s not the case that what goes up must always come down, but even in the best case scenarios growth rates have to level off.
  3. Earnings gains through cost cutting. A recent example is HSBC bank, which has already cut $4 billion in costs and is looking to lop off another $3 billion. This has shored up earnings enough for the stock to outperform its sector over the past couple years. Sometimes cost-cutting is necessary, but only as a temporary, corrective tactic. Serial cost cutting is not a strategy for long-term growth, so if that’s the only way a company is improving its earnings, don’t bet much on its future.
  4. Story stocks. These are the companies with compelling-sounding concepts behind them. Often they involve the next great franchise, or the next big thing in technology. It’s bad enough that those stories are often better than the actual product the company offers, but even when there is something real behind the story, these stocks are prone to be overpriced. Remember, you aren’t the only one who has heard the story, so keep in mind what that may have done to the stock’s price.
  5. Asset bubbles. These are things investors pile into just because other investors are piling into them. Gold was one until recently, and before that, real estate. If you feel tempted to get into an investment just because that’s where it seems the crowd is going, be aware that you may be buying into a classic asset bubble.
  6. The interest rate contradiction. This is a particular oddity of the current situation. The stock market has been rising lately on optimism about the economy. Beyond that, stock prices have been driven up in recent years because interest rates are extraordinarily low. The Federal Reserve has made it clear that it will back away from its low interest rate policies once the economy improves, yet the market has been a little skittish whenever there have been hints that the Fed might allow interest rates to rise. In short, the market seems to want both economic improvement and a continuation of record low interest rates, but the two are somewhat contradictory. If valuations are based on optimistic earnings projections but what are essentially pessimistic interest rate levels, one part of this calculation won’t work out.

Don’t get me wrong. I’m actually mildly optimistic about the economy itself. As for the stock market though, it seems to have over-anticipated the good news, leaving relatively little more to gain and a great deal to lose if the economy disappoints.

12 Responses to “Don’t believe the bull”

  1. There is always a risk when you\’re investing in stocks or anything else for that matter. My strategy has always been to always go for the smallest amounts of profits and as early as you can get. I don\’t let greed take over me. That\’s the soundest thing I can add. Good Work on the article.
    Check Moving average crossover strategy if you are into trading.

  2. Anonymous

    Personally, I really don’t believe timing the market is the right thing to do when it comes to investing. Our country’s (Philippines) economy was doing great last month, then after a few weeks the market crash because most foreign investors pulled out and sold their stocks.
    If you invest before that and you didn’t sold your stocks, then it would take at least a year before you can pull even. So, I’m against to timing the market.

  3. Anonymous

    Great advice from the article and comments. I do think the markets are long in the tooth and are held up by the Fed. Just hard to tell when the end comes. Could be tomorrow or five years from now. Focus first on risk, then return and you will come out ok.

  4. Anonymous

    The hardest part about investing is separating the noise from the truth. Timing the market is impossible. Build a balanced all weather group of large, medium and small cap funds with growth, value and blend that suits your risk tolerance. Use index and no load funds and ETFs and just sit back and watch it gradually grow.

  5. Anonymous

    I don’t attempt to time the markets and I don’t think anyone should either. So I don’t really care if we are in the middle of a bull market or not – it doesn’t affect my investment strategy.

    But historically, news headlines have been the most optimistic right near the market tops.

  6. Anonymous

    Thank you for the pointers you have shared regarding the trades on bull market fever. I am going to make sure I follow some of the basic tips you try to make us understand. Surely I can use it on trading with binaries and I can also partake your opinion on binary options broker review that I always read before I trade. And hopefully there will be more posts so all my trade will be closer to accurate.

  7. Anonymous

    Right now, the market’s overvalued again. 🙁 I’m hoping that it will pick up so that it corrects itself without losing value, but I’m not holding my breath.

  8. Anonymous

    Don’t invest just because people are making money. Timing is everything and sometimes you may need to wait on a pull back. Too many people just jump in at the highs only to get caught with a decline. Remember dollar cost averages and taking profits when profits are made to make money.

  9. Anonymous

    As soon as it starts to heat up and everything thinks you should jump in is precisely the time you should consider not investing or pulling out.

  10. Anonymous

    I just love it you can switch to the different financial channels on the boob tube and hear different commentators give their takes on the same market indicators and they are 100% opposite of each other. It is almost like they pull their daily economic talking points out of a hat and roll with it.

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