A Safety-First Approach to the Bull Market

12/27/2017 5:00 am EST


James Stack

President, Stack Financial Management

After a weak start in November, Santa Claus is back on course to deliver a good dose of holiday cheer for investors, notes Jim Stack, money manager and editor of InvesTech Research.

The Advance-Decline (A-D) Line — the cumulative sum of NYSE daily advancing issues minus declining issues — measures market breadth and has been a very reliable indicator of market tops.

It gauges if investors are participating across a healthy, broad section of the market or only in a selective, narrow slice. Typically, this indicator peaks three to six months ahead of a market top, so the recent high still supports the outlook for the bull market to advance.

The Dow Jones Transportation Average had been substantially diverging from blue chip indexes for several months. However, the recent surge in this economically-sensitive index has pushed it to a new high, providing further evidence that additional market profits are likely ahead.

The economy is not disappointing either. Almost across the board, with the exception of a dip in consumer expectations, economic statistics are coming in solid.

Consumer confidence is currently running near a 17-year high, giving a solid boost to holiday retail sales. In analyzing the survey results, most of the increase came from expectations of an improved economy and higher real sales. Not since the Reagan years have small businesses been this excited about the future. Consequently, it appears the economy is heading into 2018 on a high note — but with high expectations to match.

Economic expansions that extend beyond 8 years — like the current one— are a rarity. In fact, only the decades of the 1960s and the 1990s have matched or exceeded today’s economic achievement.

Unfortunately, lessons from both those eras have taught us to be skeptical about the “blue skies forever” forecasts, and to be prepared for the manias or dangerous bubbles that typically appear only when speculative excesses are rampant.

While some advocates might vehemently disagree with us, we feel the party will end badly for participants when the punch bowl is taken away — just as it did in the Go-Go Fund Mania of the late ’60s and the Internet Bubble of the late ’90s.

Thus, while we still see the potential for further bull market highs next year, it’s important to remain both cautious and vigilant. Enjoy this holiday season and any portfolio gains it may bring, but avoid trying to maximize profits in this increasingly high-risk market and maintain your safety-first focus.

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