There are lots of reasons to be bearish – but you should stick with the bulls

Traders the New York Stock Exchange © Johannes EISELE/AFP/Getty Images
Stick with the bulls

This article is taken from our FREE daily investment email Money Morning.

Every day, MoneyWeek's executive editor John Stepek and guest contributors explain how current economic and political developments are affecting the markets and your wealth, and give you pointers on how you can profit.

Sign up free here.

One of the big stories in the markets this week has to be the S&P 500 breaking above 3,000.

The Dow, the S&P 500 and the Nasdaq – the three main US indices – are all now at all-time highs.

That’s quite something.

I could probably find a hundred arguments, if I looked hard enough, as to why these markets are set to reverse.

But let’s boil them down to a handful.

Just a few of the many reasons to be gloomy

Current prices don’t reflect economic reality. What’s going on in the real world in no way reflects what is going on the stockmarket. Stocks are overvalued, immensely so, some would say – by some measures even more so than in 1929.

According to the cyclically adjusted price/earnings ratio (CAPE, also known as the Shiller p/e), “market valuation is around the level of the 1929 crash and above the level of the 2007 one (but not yet as ridiculous as it was in the dotcom boom of the late 90s)”, says Andrew Craig of Plain English Finance.

Then there’s the sheer length of this bull market. There have been some wobbles – in 2011, in late 2016/early 2017, and at the end of last year. But these aside, the stockmarket has done pretty much nothing except go up since March 2009, when it was sitting at just 666.

From 666 to 3,000-odd today – that’s quite some move.

Bull markets don’t go on for this long. Markets are going to crash any minute.

Then there’s the extraordinary new economic environment in which we find ourselves. A decade of interest rates at little more than zero, enabling cheap debt (for some, but not all). Inflation may not have shown up in official measures, but it has certainly manifested itself in financial assets.

Companies themselves have taken advantage of the environment and exploited the easy money to buy back their own shares.This has pushed up their price even if corporate profitability is not much better than it was five years ago.

None of this is normal – it’s an artificial environment, and markets have a habit of punishing such artifice.

The trend is your friend until it ends

What can I say? I have a lot of sympathy for these arguments. I always have a lot of sympathy towards bearish arguments when I hear them – many of us do – it’s hardwired into us.

But the fact is they are on the wrong side of the trade. These markets keep going up. You don’t see all-time highs in a downtrend, they are characteristic of an uptrend. New all-time highs tend to lead to more new all-time highs.

We are not just seeing it in the three main US indices, but within those indices. No surprise, tech is the leader. But consumer staples too are at new highs, while financials – though not at all-time highs – have broken above resistance.

The only laggard has been the small caps, as measured by the Russell 2000 index. At 1,560 compared to its 2018 all-time high of 1,740, it still has a way to go.

The Wilshire 5000, on the other hand, which is an index of all actively traded US stocks, weighted by market cap, is also at all-time highs.

I have said it more times than I care to remember: trends are powerful things, they defy reason and logic – or whatever you want to call it – a lot of the time. But you don’t need to know about reason and logic; all you need to know is which way the trend is going and then invest accordingly.

Back in April, I outlined a simple method by which you can identify and follow trends. It said buy, buy, buy. Today we remain on a buy signal.

I don’t know how long this bull market will go on for, but I do know that this is a bull market, and in a bull market you want to be long.

It sounds trite, but we will know when the bull market is over because the trend will be in the opposite direction. My system will give you your sell signal.

For now the trend is up. And you don’t want to be bet against the trend – even if this market is overvalued, or the bull market has gone on too long, or the economic environment in which we find ourselves is so artificial and precarious.

Buying new highs is a better strategy than selling them.

It won’t go on forever. It never does. But the trend remains up.