Is It Time to Sell? Assessing the Stock Market’s Bull Run
As the year draws to a close and holiday festivities unfold, one question has become a popular topic of discussion: "Is the stock market in a bubble?" Investors often seek definitive signs that indicate when to sell, only to find themselves overwhelmed by the noise both from the media and informal conversations at social gatherings. In addressing these concerns, it’s crucial to remember that an informed examination of historical trends and market indicators can provide clarity. As discussed in my recent book, “Investment Atlas III – Creating Wealth Using Historical Trends,” several analytics exist to help investors assess the health of the current bull market.
With over three decades of experience as a market strategist and portfolio manager, I rely on a series of key indicators to evaluate market strength. Historical data suggests that the combination of the 40-week moving average of major stock indices and the NYSE Advance/Decline Line (AD Line) offers a reliable method for detecting market tops. This methodology has shown effectiveness in identifying critical market moments in 1929, 1973, 2000, 2007, and most recently, in 2021. These indicators can serve as vital tools for investors looking to navigate market conditions and discern when a peak is approaching.
Understanding the NYSE Advance/Decline Line is essential for gauging market momentum. Unlike the S&P 500 Index, which is weighted based on market capitalization, the AD Line accounts for the movement of all stocks on the NYSE equally. This comprehensive approach provides a clearer picture of market direction and tends to signal changes in that direction months before they manifest in larger indices like the S&P 500 or Dow Jones Industrial Average (DJIA). Thus, keeping an eye on the AD Line may offer investors a significant advantage in time-sensitive scenarios.
Using these investing tools effectively requires a grasp of overall market trends, not just selecting individual investments. The 40-week moving average and the AD Line serve as technical indicators that should move in tandem with market prices. If they diverge, particularly after crossing moving averages, it could signify an impending shift in market direction. Currently, the signals indicate a robust bull market, as the relevant indicators are still trending upwards, showing no signs of immediate weakness or instability.
For investors, adopting a dual strategy—offensive and defensive—is essential for crafting a wealth-generating investment approach. Success hinges not merely on outperforming the market but on establishing a disciplined investment plan that includes defined performance goals, strategic asset allocation, and a proactive system for monitoring and rebalancing assets. Contrasting views exist among advisors, with some advocating for a consistently 100% invested position. However, I argue that the primary objective for investment advisors should be to align with clients’ overall investment goals, especially during market downturns. Thus, knowing when to enter or exit the market is as critical as determining what assets to buy or sell.
Ultimately, history demonstrates that all bull markets conclude; hence, preparing during prosperous times is vital for investors. The wisdom from veteran Wall Street experts suggests that a strategy focused solely on remaining fully invested in stocks without regard for market conditions may be imprudent. Embracing lessons from the past equips financial professionals to become adept users of historical insights, ensuring they do not fall victim to the pitfalls of market timing. In conclusion, as we approach an uncertain economic landscape, discerning when to sell and when to hold is essential, and using proven analytical tools can offer much-needed guidance for prudent investment decisions.
