When will the Bull Market End??

Are you invested in the equities markets?  Are you worried that equity prices may be inflated?  Are you concerned that the bull market will make a correction?  If you answered yes to these questions you are not alone by any means.  Since the financial crisis the markets have been on a path that has lead almost straight up.  Yes there have been a few dips but on a whole we have seen some great gains from the lows of 2008 and 2009.  According to Money the January indicator has been wrong 4 of the last 10 years and over the last 5 years the S&P 500 has about tripled.  Now February of this year was good compared to January overall lending that the market may not be done with its run.  So what is it you need to focus on to try and keep up with the market?

First we need to keep an eye on revenues and understand them and what they mean.  While the average S&P earnings for a company was up 15% revenues for those same companies were only up about 2.5%.  With such a disparity between the two it must be asked how these companies achieved such earnings growth on such modest revenue.  To understand that one must look at the underlying numbers and examine the income statements.  In most instances companies increased their earnings through cost cutting and savings on expenses in general.  Also, many companies reduced the outstanding shares through stock buybacks that many companies have been doing in recent years.

By looking at the price to sales ratio you can use that as a historic guide to where the markets might go next.  Currently the S&P is at 1.6 and since 1993 in the three years following a 1.6 ratio the average return on stocks has been about 1%.  Now if the ratio were to hit 2.0 that is a huge sign of trouble ahead for the markets.  In 2000 the ratio hit 2.3 and over the next three years equities lost 44% of their value.

If a few stocks result in new highs that is a sign things may be changing.  In 2000 it is estimated that about 50 companies are what drove the S&P to then record highs.  To track this yourself all you need to do is to examine the advances and declines on a daily or weekly basis.  If the market sees big moves and there are few companies that actually advanced this is the sign that should make you worry.

And finally there is the advice of the greatest investor of the modern age, Warren Buffett.  And that is, “Be fearful when others are greedy.”  If people think the outlook is bearish the markets will generally lose value the following year.  And when the long term outlook is fairly high the markets are modest in their returns.

There is no way to predict the markets with any success but historic data is useful in spotting possible trends.  Use common sense and never try to time the markets but rather be watching what they tell you.  When you see an anomaly it may be time to take action.

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