Now that the interest of the “cash under the mattress” crowd in the market has piqued, I wanted to discuss what market bottoms and tops actually are. First of all, no one can time the market.
At a market bottoms the numbers of investors have surrendered and are convinced that the market will continue to decline over the foreseeable future. At a market top, the maximum number of investors has joined the party and is convinced that the market will continue to advance indefinitely. Both bull markets and bear markets are supported and driven by stories with no basis. Everyone has opinon on the causes of the trends in stock prices.
The reason people are using to explain the current bull market is the Federal Reserve keeping interest rates at historical lows. This has forced investors to abandon fixed income for returns in the stock market. The S&P 500 now yields 2%; which is better than nothing. However, people are slow to change their beliefs. This is why most investors stay on the sidelines after they sold their stocks in fear at the market bottom.
The current bull market has been in existence for four years and the doom and gloom stories have always gotten the most press. Early investors are sporting large gains and the doubters are beginning to look like fools. The latecomers are the last to recognize that the positive story no longer holds water. That is why the average investor who is trying to do it on their own has very low returns.
Market tops stretch out over time due to the “buy on the dips”. These are usually the “I don’t want to miss the next upside” crowd. However, the first time the dips turn into a correction it’s back to cash. Therefore locking in their losses and missing the next upturn.
Today’s bull market reflects wide acceptance of the Fed story. When will this change is anybody’s guess. Stocks can go up further and longer than anyone expects. This is why I preach it’s best for the average investor to disconnect from his or her limited vision of the investment world and trust in a clear discipline, based on fact, with a very long history of success.