The above chart is a chart that gets thrown around a lot by the perma-bears and fear mongers, to let people know that the market has gone up too much, and it’s due for another 50% decline. As you can see, the chart has been publicised countless times—when the SP500 was up 95%, 125%, 150%, etc…
Bull markets can last longer than people can stay rational. But something is about to happen that will put the wind behind the perma-bears backs. The simplest and most general definition of whether or not we are in a bull or bear market is if we are trading above the 10 and 20 month moving averages. Bull if we are above, Bear if we are below. Many money managers tend to get defensive ( tactical) when the market is below those averages. By looking at the chart below it is easy to see why. Bad things tend to happen when we are below those monthly averages.
Unless the SP500 rallies 8% tomorrow, we are going to close below the 10 and 20-month moving averages. What that means to me, is that tactical investing makes more sense than passive investing until we get back above those averages.
Staying tactical when we are below the 10-month moving average has bode well over time. Meb Faber has done extensive work on this subject, below are some of his charts that prove that timing the market base on the 10-month moving average has paid-off.
Tactical doesn’t mean you sell everything and go to cash, or go 100% short because we are trading below these moving averages. It means, be ready for things that happen in bear markets; rallies get faded, panic will be bought, you will get many fake head starts, bear traps will lead to huge 1-day rallies, despair will come into play, you can easily chop your account to pieces during this time, experience day-traders will do well, mom and pop will have 2008 flashbacks, Robo investors will second guess their strategy, etc.