Is it Time to Sell? How to Tell
As I go to parties this post-election holiday season, I am often asked, “Is this a stock market bubble?” Unfortunately, many investors fruitlessly search for a magic indicator to pick the top of a bull market or take advice from strangers at a dinner party.
As outlined in my latest financial history book, “Investment Atlas III – Creating Wealth Using Historical Trends”, there are several tools stock investors can use to gauge the health of an old bull market similarly to how doctors use various tests during routine physical exams on their patients.
As a 33-year veteran with documented track records as a market strategist and a portfolio manager, I use a series of indicators to gain a consensus as to the market’s overall strength. Although many tools are used in stock market analysis, the 40-week moving average of major stock market indices combined with the NYSE Advance/Decline Line (AD Line) proved effective in detecting significant market tops in 1929, 1973, 2000, 2007 & 2021.
What is the AD Line?
This measures the number of individual stocks trading on the New York Stock Exchange (NYSE) that are moving up versus down. It differs in that it treats all stocks equally and doesn’t weight stocks based on market capitalization (size) as the S&P 500 Index does. Simply put, a different way to look at market direction and typically leads direction changes many months ahead of the S&P 500 or DJIA.
How to use these investing tools?
It’s important to remember that successful investing is as much about identifying the overall stock market’s trends (i.e., when to buy or sell) as it is selecting individual investments (i.e., what to buy or sell).
Moving averages on stock market indices or AD lines are technical trend indicators. The simple and effective way to use these tools is to remember the indicators normally should be moving in the same direction as market prices. When these indicators are moving in opposite direction to market price and cross the moving average (called a divergence), there is a strong possibility of a significant change in market direction in the future.
Currently, this bull market is healthy!
In comparing the current market to past market tops listed above, we can see the indicators are continuing to move up thus showing continued strength without any sign of weakness. (See charts below)
What should Investors be doing now?
A wealth creating investment strategy requires both an offensive and defensive plan.
Investment success is much more than beating the market: it requires a disciplined strategy with a predetermined performance goal, a logical asset allocation, a proper investment-monitoring system and a policy for re-balancing one’s holdings.
Other advisors may adhere to a policy of being 100% invested at all times, avoiding proper attention to the entirety of the investment climate. I believe the primary job of an investment advisor is to meet the client’s overall investment goals during good markets and to minimize losses during bad markets. In other words, knowing when to buy or sell can be as important as knowing what to buy or sell.
Similar to sporting events or military campaigns, victory comes from executing a solid strategy with a good offense and an effective defense — seldom only one or the other.
History shows that all bull markets come to an end and best to prepare when times are good. I believe that the old Wall Street pros of yester-year would find the modern strategy of investors being 100% invested in stocks 100% of the time regardless of market conditions was laughable.
Be a successful user of financial history, not a future victim of it!
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