October 21, 2013

Are We Near the End of a Long Bull Run?

Stocks have been on a run for quite a while now. Is the market about to turn over? Does history contain any lessons for us? In this post, we'll look at the past 13 years of Dow history and reveal what one prominent money manager believes is lurking around the corner. Of course, no one can say exactly how long of a corner it may be. Let's begin by retracing the steps of the Dow from January 2000 until the present. 

The Dow: An Overview

At the height of the tech bubble, the Dow Jones Industrial Average peaked at 11,723 on Jan. 14, 2000. Then the bubble burst and the Dow began a 32-month descent. It wouldn't reach this mark again until Oct. 3, 2006, six years later. After the Dow bottomed on Oct. 9, 2002, five months later in March 2003, animal spirits took hold and propelled the Dow to another record high of 14,164 on October 9, 2007. 

Then came the housing market collapse and the near ruin of our entire financial system. From there, it only took 17 months for the Dow to bottom this time, reaching 6,547 on March 9, 2009, a level not seen since April 1997. Since its bottom, the Dow has been on a 55-month run, with intermittent corrections and high volatility at times. The worst correction occurred in mid-2011. 

Anyone who understands stocks realizes there will be bullish and bearish periods. However, investors who began in January 2000 had nothing to show for their patience 11 years later. Moreover, for those who sat and watched their profits melt away during the recent bear markets, patience may be a bit hard to come by. Will there be a third bear? Probably. But when will it occur and how bad will it be? That's impossible to say. The following table illustrates the most recent bull and bear markets since 2000, how long they lasted and the Dow’s return in each period.

 

The 53.8% decline after the sub-prime crisis took 517 days. Last Friday was day 1,684 of one of the strongest bull markets in recent history. Are we near the end of this bull run? If you ask well-known manager Rob Arnott, we are. In fact, according to unnamed sources within PIMCO, Mr. Arnott is short U.S. stocks in his PIMCO All Asset All Authority fund (PAUIX).

As I also understand it, he isn't concerned about missing the last leg of a bull market. In fact, he would much rather exit early rather than late. I would tend to agree. What if he is correct this time? Are there some measures we should be taking to protect our clients? I believe there are. 

Protection

I have been saying for some time that investors should be careful with the market at these levels. In fact, this bull run is almost 50% higher than the 2003-2007 period. Hence, if we are nearing the top, we should be protecting our clients’ assets. I continue to buy stock ETFs on the dips and add trailing stop orders. TSOs are an excellent way to place a safety net beneath a position. The salient question is what percentage I should use on my stops. I'm in the midst of analyzing this. I am also changing my stock allocations from mutual funds to ETFs with a mix of passive and active. 

One thing's sure, it's nice to be able to sleep at night knowing my clients are protected. How about yours? 

Thanks for reading and have a great week!

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