The odds are overwhelming that you will not recognize the top of the bull market when it finally comes to an end.
That would be important for any investor to keep in mind, but especially so for retirees who don’t have as long a time to recover from any bear-market losses. So if you are so exposed to equities that a bear market would lead to intolerably large losses, you should reduce your equity holdings now rather than labor under the illusion you’ll get out before the next bear market.
The occasion for reminding ourselves of these truths is this month’s 11th anniversary of the October 2007 bull market top. Following that month’s top, you may recall, the most severe bear market since the 1930s ensued. Yet hardly anyone that month was in a bad mood.
I know because my Hulbert Financial Digest in October 2007 was tracking the performance of nearly 200 newsletters. In conducting the research for this column, I dug through the HFD archives, focusing on those newsletter issues published on the exact day of the October 2007 market top, or in the days immediately prior.
Below is a random sampling. To set the stage, bear in mind that the comments below were made just as the Dow Jones Industrial Average DJIA, +0.15% was registering its highest close ever at 14,164.53 on Oct. 9, 2007. Over the next 15 months, the Dow would fall to 6547.05, a drop of 53.8%.
Another way of putting these comments in context: They were written just as the Dow would enter a five-and-one-half year period in which it was lower.
To keep the attorneys happy, I am not mentioning the names of the editors making these comments. But rest assured that each of them was widely respected as a serious student of the market:
•“The global bull market in stocks not only continues, but… it’s also entering a strong phase… Now that the Fed has waved the flag that interest rates are going lower, there’s really nothing holding the market back.”
•“Dow 16,000 here we come… [I]t appears to us that the stock market is off to the races for the next 3 to 6 months.”
•“The risk of a cyclical bear market decline in excess of 20% is not on the radar screen.”
•“The longer-term bull market is intact… You should be looking to buy on any weakness.”
•“It’s been a while since I’ve felt so confident about the potential for making some great gains with our serious money. So, if you haven’t done so already, it is essential that you get your money into this [stock] market as quickly as possible. Time waits for no man, and your money is waiting on you. So go to it.”
•“If you listen carefully, you can hear the rumbling. That rumbling is the distant thunder of the third phase of this great bull market… I see the good times rolling, I really do.”
I could go on and on, but you get the point.
With the perspective of hindsight, of course, these comments are nothing short of cringeworthy. But the point of this exercise is not to make fun of these editors. On the contrary, my point is that if these editors could get it so wrong, what makes you think you could do any better?
To be sure, in October 2007 there were a handful of bears among the market timers I monitor. So to that extent I was somewhat selective in choosing quotations only from editors who were bullish. But only slightly so; bullish exuberance was widespread at that market peak.
Consider the average recommended equity exposure among all stock market timers the HFD monitored in late 2007, not just the few quoted above. As you can see from the accompanying chart of the Hulbert Stock Newsletter Sentiment Index, or HSNSI, this average exposure level was higher the week of the bull market high than at any other time over the last five months of 2007.
It’s worth noting that the HSNSI level today is almost precisely where it stood at the October 2007 market top. From that similarity, of course, we can’t conclude that a bear market like the Financial Crisis is about to begin. But, by the same token, we also can’t conclude that such a bear market is not about to begin.
And that’s the point. Our moods are an unreliable guide to what the market is going to do. That’s why having a disciplined financial game plan is so essential.
The key is finding a portfolio and game plan you can actually live with through a bear market. If you haven’t yet found one, you should with all deliberate speed undergo whatever financial planning process is needed to arrive at one that is appropriate.
The worst thing would be for you to wait until the bottom of the bear market to try to come up with a tolerable strategy.
For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com.
