This is also the stage where volatility plays a greater role. The markets quit bounding up day after day and there were real corrections (at least 5%) just to keep the herd on the sidelines.

Stage 3 – “All clear! Don’t miss this.”
This is the final stage. It’s when the bear market has been forgotten by most investors. It’s when the “panic buying” sets in as the big money fears 1) it has missed all the chances to buy low, 2) their performance will suffer, and 3) customers will take their money elsewhere.

To make up for lost time, they buy more aggressively than ever. This is an extremely profitable stage. Yet when the big money runs out of cash to buy shares, watch out, the end of a bear market rally is near.
The clearest indicator we’re in the third and final stage is the stagnating upward momentum. The S&P 500 rose 36% in the first two months of the rally. It rose a respectable 13% in the next three months. It rose 6% in the last three months.

The rally appears to be running out of steam. At this time, however, most investors feel more comfortable buying stocks than they have since the rally began. GDP is up, earnings are up, and corporate executives are issuing positive guidance about their near-term growth prospects (most refused to even venture a guess last year).

The “all clear” has been sounded by executives, analysts, and many others. And investors continue to put more money to work (or, from our philosophy, at risk). Last week was the 34th week in a row in which investors put more money into mutual funds than they took out.

As for the aggressive, panic-style buying we expected, it has been largely masked by the rebound in share prices. For instance, a mutual fund manager who wants to buy 10 million shares of Bank of America only had to put up $40 million in March. A few weeks ago, the same stake would cost $180 million. As a result, a lot more money may be going in, but it’s having a significantly less noticeable impact.

It’s Never Different This Time
As this rally shows greater and greater weakness, the risk and reward situation continues to turn against going “all in” now.

Also, since most of them have the wind at their backs and a renewed confidence, they’re sure they will be able to achieve the nearly impossible and get out at the top.

Since it’s never different this time, we know those facts are not going to stop investors from trying either one of them.

That’s why right now, the best advice we can follow is what we’ve stuck to since the beginning.

Look for sectors with exceptional fundamentals, identify the best risk/reward opportunities in those sectors, develop a plan, and stick to it.

Although day-to-day it never feels quite the same and emotions, left unchecked, will quickly cloud out reality, we know it’s never different this time. And there’s no reason to expect this rally to play out any different than every one that has come before it and every one that will come again.


Andrew Mickey is Chief Investment Strategist, Q1 Publishing

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