I’m feeling pretty positive nowadays. The column on the emergence of America’s energy sector as a global powerhouse and the resurgence of American manufacturing got me quite a bit of feedback.
Some of the feedback was negative, but the majority was quite positive. Anecdotally, it seems people are feeling pretty good right now and this is reflected the stock market as well.
Major indexes are hitting new highs on a weekly basis. Money is flowing out of cash and bonds and into stocks. Nothing makes us feel better than stocks going up.
But financial markets are a continuum, not a destination, so even when things are going well we are behooved to step back and be thoughtful about our disposition.
Experience shows there are four stages to a bull (positive) market.
The first stage is apathy. Bull markets always begins on the back of bear (negative) markets. Investors are fatigued, scared and not interested. This disinterest leads most bull markets to begin quietly with only the most experienced and institutional investors coming to the game during this first inning.
After the market has moved and investors on the sidelines have noticed, they justify their lack of participation by disbelief. “This is a bear market rally” or a “sucker's game” is often the mantra of those not participating, making the second stage of a bull market the denial stage.
It’s been said the stock market “climbs a wall of worry.” After the market moves continually higher, those on the fence are no longer able to maintain their denial and third stage is ushered in, the acceptance stage. During the acceptance stage stocks are once again viewed as a positive long term planning tool and individual investors become comfortable increasing the overall stock exposure in their portfolios.
This infusion of new money ushers in the fourth stage, which is both the most fun and most dangerous: euphoria. During euphoria stocks become volatile to the upside driving speculative companies higher with wild daily price swings. Everyone seems to have a hot stock and individual investors often become obsessed with trading and complacent with the increasing stock exposure in their portfolios.
The euphoria stage can last for some time, but it always ends the same. Eventually the market corrects and the stages are reset. Investors late to the rally lose money
Unfortunately it is impossible to know exactly what stage the market is in, and it is only with the benefit of hindsight that stages can truly be identified. There are, however, a number of market intelligence reports that gauge bullish to bearish sentiment among investors. When sentiment becomes too bullish, it could indicate euphoria and red flags are raised. I’ve read two reports in the past week indicating bullish sentiment is rising toward this territory.
Does this mean the party is over? Not necessarily, but maybe it gives us the chance to recognize there’s less beer in the fridge than there was earlier in the night.