In a bull market, people wait eagerly for dips, hoping to buy, feeling foolish they had not gotten in earlier. This eagerness to buy on dips limits the downside — and people know it does, which feeds the bullishness, which can last a long time. At the top, there may even be books with ridiculous titles like, “Dow 36,000.”
In a bear market, people wait eagerly for rallies, hoping to sell, feeling foolish they missed the chance to sell much higher. This eagerness to sell limits the rallies — and people know it does, which feeds the gloom. This, too, can go on for a long time.
Ultimately, of course, a bull market will be brought down by . . . something (usually, rising interest rates followed by a recession), and stock prices that may have climbed above all reasonable levels of valuation will decline back toward those levels. Indeed, they will often keep falling well past reasonable valuations.
And then at some point — very quickly or only after a long time (one only knows with hindsight) — the bear market will end, as selling pressure is exhausted and psychology turns (possibly because the Fed has signaled that high interest rates can safely begin a downward trend).
Where are we in this cycle? Your guess is as good as mine. The market certainly doesn’t feel very bullish here, yet prices of most stocks are hardly cheap, let alone irrationally so. So we may be in just the early stages of a bear market.
Or we may already have weathered the worst of it, in large part because some highly positive trends that underpinned the bull market may continue:
- Tremendously exciting advances in technology that greatly enhance human productivity. (But by making price comparisons so easy, and price competition so fierce, might they also decimate profits?)
- Generally lower defense spending that frees up capital and labor for more productive endeavors. (But are arms build-ups gone forever? Are major conflicts a thing of the past?)
- Generally freer trade that works to make the world economy more prosperous and efficient (see Ec 1: the rules of comparative advantage).
- Globalized communication that works in favor of democracy (it’s hard to keep people in the dark, or keep them from organizing, once there’s a modem in the village) . . . and that, thus, works in favor of peace (democratic governments do not start wars). But what do we do if one of these viruses ever DOES destroy all the world’s data? You remember the Plague that devastated Europe? Now we have a new kind of plague to worry about. CyberPlague.
So who knows where we are? You decide: are you, personally, eager for dips so you can buy — or for rallies so you can sell?
And how will you feel five minutes from now, when stocks have switched directions?
Quote of the Day
Follow a tip from a company's president and you will lose half your money. Get a tip from the chairman and you'll lose all of it.~Bennett Goodspeed (The Tao Jones Averages) quoting a canny Scot.
Request email delivery
- Jul 24:
- Jul 23:
John Bolton and Kentucky — Sweet Defeat
- Jul 20:
He Is A . . .
- Jul 19:
Snake Oil, Fish Oil, And Fat Shaming II
- Jul 18:
Be Logical And Be Generous
- Jul 17:
What Democrats Stand For II
- Jul 16:
What Your Money Goes To Fund
- Jul 13:
Playing It Very, Very Smart
- Jul 10:
Buy and Hold Part II
- Jul 9:
- Jul 24: