Less than Four Years… Another Bull Market???

This article was by RC Peck, CFP® for the Fearless Wealth Newsletter in February 2004.

Winter has hit San Francisco. To a local that means rain and colder weather, but no summer. Cold weather in San Francisco is anything below 50 degrees Fahrenheit, which usually occurs only during the middle of the night.

What’s funny about San Francisco winters is how “un-winter” they are (they happen in spring and summer), at least for me. I grew up in the Midwest and then moved to the Northeast and then to Northern California, so you’d think I could handle any type of winter thrown my way.

After decades of dealing with Chicago, Minnesota, Cleveland, Indianapolis, Boston and Manhattan winters, San Francisco’s should be a cake walk.

In some ways this weather is easier on me, especially when I think back to the good old days in the Midwest. But it feels as though my body has acclimated rather quickly to the milder winters in Northern California.

We humans are quick to adapt to our surroundings, and the memory of the past can be quickly wiped out by the current situation. So now, when San Francisco weather dips into the 50s or 40s, I think it’s really cold.

My buddies living in Chicago laugh at these “cold” temperatures because they are reminded every day of what cold “really is.”

If you think weather quickly fades into memory, take a look at the making and losing of money. The memory of market and investing events is probably lost faster than those of what the weather was like where you grew up, which makes sense because there are more emotions involved when you were growing up.

The markets are at it again. Less than four years after the bursting of the biggest stock market bubble in US history (March 2000), the bull market is on. Just four years past the worst bubble in US history and we are already pumping up a new one.

I thought it would take at least ten years to get to market values we are seeing today, but I was wrong (many years ago I learned to not confuse my opinion with the opinion of the markets. The market is always right—even if it’s irrational.

We’re in a full bull market and the prices are on a run. I need to first give my definition of a bull market so my readers aren’t confused. There are two criteria I use to determine whether or not we are in a bull market.

One is the market’s long-term trend and the other is its short-term trend. Long-term is measured in months and years; short term is measured in weeks.

I view these trends by plotting moving averages on a price chart. In this case I would look at all the indices in the US (S&P 500, Dow Jones Industrial Average, NASDAQ, Russell 1000, Russell 2000, Russell 3000, and the Wilshire 5000).

I start by putting a long-term moving average on these price charts (a moving average is a line that plots the average price over a given amount of time).

If I had the ten-day moving average of Microsoft I’d see a line on my chart that would be its average price during the last ten days. If I wanted the 20-day moving average, then the chart would show a line that is made up of the last 20 days’ worth of prices, and so on.

What’s great about moving averages is they show you in seconds which way the stock, the index or the market is moving, so there is no guessing.

What has just occurred in the markets is that the long-term moving averages for all the indices clicked green (or up) in May of 2003. So on a long-term basis (looking at months and years) we are moving up for the first time since March 2000.

I personally don’t think the markets should be going up; but who cares what I think? The markets are always right, even if they shouldn’t be. Do you follow?

We are as over-valued today as we were three and a half years ago. The S&P 500 sits at a P/E ratio north of 30. This is very high, and no, times are not different. Do you think times were different when the car was invented, the radio was invented, or the West was opened? Nothing has changed. These markets are expensive!

We humans are bidding up the prices of every major stock in this country, for better or worse (I will tell you why I think this is happening in a second). I’m suggesting that you be part of the trend because the trend is everything. But don’t fool yourself and think that the good times have returned. You see, the markets can be illogical longer than you have money in the bank to back up your belief. So hold your beliefs and never bet against the trend. Get in this market if you’re not already.

Just because I think it’s good to be in this market doesn’t mean this is a “buy and hold forever” stage of investing. This is a “buy-and-get-out-when-the-market-finally-corrects” stage. This market is going to come crashing down very hard and fast, much harder and faster than the previous bubble did in March 2000.

Did you know that the majority of people lost money in 1930 and not 1929? It’s true. The first bubble popped in October 1929 but it was only when the second bubble burst in 1930 that the remaining believers were taken out. I think we could be in a similar situation today.

We may not crash like 1930, but this next correction is going to hurt a lot of people who do not have stop losses on their stock positions.

Stop losses are the silver lining in this situation. Get into the market and let your money grow, but don’t be in without a stop loss on all of your positions.

A stop loss is an order you can place with your broker or brokerage house that says if the stock falls X percentage, or if the stock falls to X dollar amount, then sell my position in it. A stop loss acts as a safety net or a seat belt when (not if) the market moves against you.

You will have a back up plan in place. Remember: Selling is 80% of the battle of growing your money.

There are a few reasons why I think the markets are going up:

  1. The government is forcing the public to put money back into the markets. With interest rates as low as they are the government is unofficially saying you will lose money if you keep your wealth in cash.
  2. The prices of houses are still increasing and people are still cashing out equity to buy “doodads.”
  3. The Bush tax cut.
  4. Most importantly, people want to recover the money they lost over the past three years, and are voting the price of stocks higher.

What to do today? Be part of this trend, but with stop losses and an eye on reality. Things can change fast.

The Lessons of this week are:

  1. Be part of this trend; it is real, deep and wide.
  2. We are in a full bull market.
  3. Put stop losses on all your positions.
  4. If you have not purchased gold yet, do so this week.
  5. Don’t worry about the valuation of the markets, but rather about whether or not you are positioned to be part of this trend.

To being part of the group as the market goes up.

RC’s Signature