The last few days the markets have churned a bit, producing some anxiety for bullish investors, and putting a bounce in the step of those that are bearish on financial markets. Yes, of course it’s unnerving for bullish investors to watch the markets have a few tough days. Investors live in an uncertain world, and when markets move counter to their view it requires a reassessment of their call. It may be that they missed a fundamental or structural change or alternatively it could just be that the markets are undergoing the natural process of shaking out weak investors and refreshing the market for its next leg up. After the torrid market run-up that has taken place off of the November or March lows (market dependent), one critical issue investors should continue to assess is how high they think the market can run before headwinds (more government, more regulation, deleveraging financial system, higher savings, higher taxes, inflation, etc.) conspire to end this bull run.
Ned Davis Research, one independent research firm we follow at Pinnacle Advisory Group, has been calling for a “Monster Rally” within a secular bear market since early this year. The chart below outlines some example of monster rallies within secularly-challenged markets (The Dow Jones in the 1930s and the Japanese Nikkei in the 1990s). The average rally on this chart is an eye-popping 55%! The bears may be correct that many risks still exist in the marketplace, the market has run “too far too fast,” and investors better not get too comfortable with this rally. But with economic conditions stabilizing, technical factors improving, valuation not overly expensive, and the Federal Reserve and government working to revive animal spirits, investors should be leery about being too far out of the market at a time when we may be in the midst of a "monster"...
Chart source: Ned Davis Research
