Bull markets don’t end in a blaze of glory. Neither is their end frantic or violent. Climax is more of a process than a single event. The reason is simple: not all sectors and styles hit their peaks at the same time.
When looking at thirty bull-market tops since the mid-1920s, the average interval between the earliest date a sector peaked and the latest was seven months. It’s more accurate to believe that a market can, and typically does, cease being a bull market long before the index starts to fall.
Consider Jesse Livermore’s tale from Reminiscences of a Stock Operator to demonstrate the point:
I went along with the rise in 1916. I was as bullish as the next man, but of course I kept my eyes open. I knew, as everybody did, that there must be an end, and I was on the watch for warning signals. I wasn’t particularly interested in guessing from which quarter the tip would come so I didn’t stare at just one spot.
My long-expected warning came to me when I noticed that one after another, those stocks which had been the leaders of the market dropped several points from the top and for the first time in many months did not come back. Their race evidently was run, and that clearly necessitated a change in my trading tactics.
Those stocks had gone with the current for months. When they ceased to do so, though the bull tide was still running strong, it meant that for those particular stocks the bull market was over. At the same time the rest of the market kept on advancing under new standard bearers.
I did not turn bearish on the market then, because the tape didn’t tell me to do so. The end of the bull market had not come, though it was within hailing distance. Pending its arrival there was still bull money to be made. Such being the case, I merely turned bearish on the stocks which had stopped advancing and as the rest of the market had rising power behind it I both bought and sold.
Livermore went long the new leaders and sold short the laggards. His shorts didn’t help much, but his longs continued to rise. When the winners finally stopped advancing, he sold them short as well. He was more bearish than bullish at this point, because the next big money was clearly going to be made on the downside. He was not, however, in a hurry.
While I felt certain that the bear market had really begun before the bull market had really ended, I knew the time for being a rampant bear was not yet. The tape merely said that patrolling parties from the main bear army had dashed by. Time to get ready.
Following the market’s peak in November 1916, the Dow fell by 40 percent. Livermore was short a dozen different stocks that had been the public’s favorites earlier in the year. He made a $3 million profit and vacationed in Palm Beach for the winter. It seemed straightforward enough.
The game hasn’t changed in over a hundred years, and neither has human nature. We’ve been roaring bulls in a wild bull market. As did Livermore, however, we’ve noticed the stocks that were leading the rally from the March 2020 bottom have stalled.
Cathie Wood’s Ark Innovation ETF, which invests in disruptive-tech stocks, has made a few attempts to recover after dropping 37 percent from a February high of $159, but it failed to break through resistance levels around $130 per share in either mid-March, mid-April, or July. Her race is up.
Given the widest disparity since 2002 between the best-performing sectors and the worst-performing, it has been a difficult year to navigate. Only 17 percent of growth funds are ahead of their benchmark. And while the bull market for SPACs, renewable stocks, and some work-from-home names has come to an end, this isn’t a sign of impending equity doom.
We are not turning bearish because the greed tide is still strong. The market can keep rising from here, even if the field of gainers is shrinking. The tape isn’t yelling “Get out!”
Just three stocks, Apple, Microsoft, and NVIDIA, account for nearly 50 percent of the technology sector’s market cap. Prices are clearly pointing upward for these standard bearers. Retail bellwether Tesla did fall 18 percent this month, but it is rallying once more. We’ll be on the lookout for a bigger, more sustained drop to warn us.
Wall Street strategists’ average prediction for the S&P 500 by the end of 2022 is 4,843, a measly 3 percent gain from here. This is the second-least optimistic forecast in two decades, trailing only 2019. That’s not how it works at the top.
We believe the S&P 500 easily surpasses the 5,000-level before the bull market reaches its climax. Of course, 5,000 is simply a number. It is, nevertheless, a significant, confidence-building milestone. Psychology has an important role in most human undertakings, including investing.
There’s at least one more thing we can learn from Livermore.
He portrayed the period leading up to the 1916 top as one in which, in the words of the late H. H. Rogers of the Standard Oil Company, “a man could no more help but make money than he could help but get wet if he went out in a thunderstorm without an umbrella.”
It was the most well-defined bull market Livermore had ever seen, and it had proven to be extremely rewarding for the public—at least for a while.
The stock market winnings during 1915 were more widely distributed than in any other boom in the history of Wall Street. That the public did not turn all their paper profits into good hard cash was merely history repeating itself.
Nowhere does history repeat itself as often or as uniformly as on Wall Street. Time to get ready.