Is It Time to Get Out of Stocks?

This is how bull markets end.

The question is, is it time to get out of this bull market?

To answer that question we have to go back to 2008 and show how we knew to get out of that bull market before it fell 58%.

We also got out of the bull market in 2000 before the 50% dot com crash. But for the sake of brevity I want to focus on the most recent market collapse in 2008 and 2009 because its most similar to today’s market.

Below is how we knew and why these usually signals continue to work even today.  

How we knew a huge about-face was happening.

Between September 2007 to January 2008 (five short months) we got all three signals telling us to get out of stocks.

We didn’t know Lehman Brothers was going to collapse later that year. We didn’t know millions would lose their jobs. We didn’t know Ben Bernanke would print trillions of dollars.

But these three signals collectively knew something had changed and the only solution was to get out of stocks.

Of course there are nuances like what is the best measurement for the bond market and the stock market? And should you include or exclude dividends? And what determines a trend change for example.

The point of this post is not to show every detail, it’s to show that there is a powerfully simple way to know if it’s time to get out of stocks.

Now, let’s get to the three signals.

FIRST SIGNAL (September 2007):
The Bond Market Says, “Get out of stocks”

SIGNAL #1: THE PRICE CHART OF THE BOND MARKET

The Bond market was falling in price from 2002 to 2007 (red section in chart).

Then the bond market broke the downward trend and started consistently trending higher in September of 2007 (green arrow and dot). Now for the first time in four years the bond market was competing with the stock market.

This was our first of three signals we needed to determine when to “get out of stocks.” By itself this signal is not powerful, but when combined with the next two they become remarkably powerfully. And cannot be ignored.

SECOND SIGNAL (November 2007):
Stock/Bond Ratio says, “Get out of stocks”

SIGNAL #2: THE STOCK/BOND RATIO PRICE CHART

 

Stocks prices were increasing faster to the upside then bonds from 2003 to 2007 (green section in chart).

The second signal telling investors to get out of stocks was the stock/bond ratio breaking down. This second signal came in November of 2007!

A stock/bond ratio is simple.

A stock/bond ratio tells an investor which of the two assets is increasing in price faster relative to the other one. And from 2003 to 2007 stocks were increasing in price more than bonds. And that changed in November of 2007 (red arrow and dot).

Now bonds were increasing in price faster than stocks!

THIRD SIGNAL (January 2008):
The Stock Market says, “Get out of stocks”

SIGNAL #3: THE PRICE CHART OF THE STOCK MARKET

The stock market was trending higher from 2003 to the end of 2007 (green section in chart).

Then the stock market broke down and started trending lower (red dot) after five years. This was our third and final signal to clearly communicate to us, something big was coming our way and it was going to greatly negatively affect the stock market.

How did we know to get out of stocks?

Three signals told us in no uncertain terms to  “GET OUT of the stocks”:

Signal #1) The Bond Market breaks into uptrend = September 2007

Signal #2) The Stock/Bond Ratio breaks down = November 2007

SIgnal #3) The Stock Market breaks down = January 2008

Five months. Three signals. One clear story.  

Prior to those three signals, the safe, stable, secure place for an investor to invest their their money was the stock market. And then three signals started yelling, “get out of stocks.”

Why does this works so well?

We eliminate.

We don’t trade. We don’t time. We don’t confuse. We don’t overwhelm. We don’t use outdated investment ideas.

We keep things powerfully simple.

We pay attention to the essential few things that matter. In other words we built a system that eliminates the noise, the confusion, the B.S., the conflicting points of view and the fear mongering.

We didn’t predict. We monitored. And then took action.

We didn’t know at the time,  the US would have the largest bankruptcy in history.  We didn’t know the stock market would fall so far and so fast that it would get its own name.  

We waited. And then we took a powerfully simple action.

The problem for investors.

Investors have been taught individual stocks are the key. Investors have been taught their age matters more than the direction of the markets. Investors have been taught the answer is found in great stories but keep ending up with lousy stocks. Investors have been taught effort matters (option trading, stock trading).

What matters most is understanding the direction of stocks, bonds, commodities and real estate. And their relationship to each other.

Four relationships. One action.

It’s powerfully simple and worked in 1987, 1998, 2000, 2008, 2011, 2015 and is still working today.

In Your Corner,

RCPeck-Dig Signature.JPG     
RC Peck, CFP

P.S. – And if you are finding yourself interested in real downside protection. The type that has been tested by two of the largest drops in stock market history, then you may want to connect to see if we are a fit. You can do that right here. 

 

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