These are truly days of wine and roses forstock market
After being knocked down in the dot-com bubble of the late
1990s and again during the financial crisis of 2008, long-term
investors are being rewarded for their persistence and dedication
asstocks surge higher, breaking record after record.
In fact, thisbull market turned 4 years old in March and is
showing no signs of letting up.
Historically, the average bull market has lasted 4 1/2 years.
In and of itself, this means little; for instance, the 1990s bull
market lasted nearly seven years without a majorcorrection .
But according to my research, there are three distinct signs
that make me think this bull market may be ending soon. Here's
what you need to know.
Thisterm is best known for its use by former Federal Reserve
ChairmanAlan Greenspan during the dot-com bubble of the late
This means that investor excitement has driven stock prices
higher than justified by fundamentalsupport . While this was
certainly true during the dot-com boom, it isn't as true
Companies are posting strong numbers, and theeconomy is
thriving. However, it is important tonote that the primary cause
of the today's bull market is unfettered Federal Reserve easing
measures. Questions like "How much is too much?" and "How long
canthe Fed keep pumping outmoney to support the economy?" make me
think that the Fed itself may be acting with irrationally
exuberance -- and a sharp pullback could occur.
Remember, pullbacks of 10% are common in bull markets. That
means 1,500-plus points in theDow Jones industrial average (DJIA)
. Be ready.
In addition, it takes a full 25% drop from the highs to signal
abear market has started. This equates to a 3,750-point drop in
the Dow. Even if this occurs, it leaves the Dow well above the
psychologically critical 10,000 level.
2. Global Uncertainty
We live in a connected world. Thedebt crisis in Europe is far
from over, further austerity measures could affect the U.S.
economy, and a slowing growth rate in China may eventually hurt
3. Fed Changes
While the Federal Reserve is theprime driver behind the bull
market, it could easily shut off the faucet.
If the Fed increases interest rates or throttles back on the
quantitative easing measures, stocks could plunge in response.
While interest rate increases are not expected until
theunemployment rate drops to 6.5%, the Fed may turn to other
measurements to make its decision. All the Fed needs to think is
that the economy is overheated and itwill step in to increase
Federal Reserve ChairmanBen Bernanke is stepping down in 2014.
His replacement may have a different market view and pull back
the reins on the easing measures. If this occurs in an unexpected
way, be prepared for the largest stock single market plunge of
Along with the three expected ways the bull market could be
derailed, economicblack swans could also end the good times.
A "black swan" event is one that is completely unexpected and
has profound effects. (The 9/11 terrorist attacks are an example
of such an event that had major effects on the economy.)
Risks to Consider:
Remember,diversification is the key to success in the stock
market. A well-diversified portfolio can weather most market
storms and create solid profits during the good times.
Action to Take -->
While the market appears technically to be topping out, anything
can happen, and it's possible it could continue much higher.
However, investors need to be mindful of these signals, which
could portend a derailment of the bull market. Remember, declines
of 10% or more are common bull market occurrences.