Many investors seem to be obsessed with well-publicized bearish calls such as the recent one from bond trader Bill Gross. According to these Cassandras, doom awaits anyone foolish enough to remain invested in common stocks. It brings to mind another old Wall Street chestnut: "There is no one more bearish than a sold out bull."
Many of these commentators have benefited handsomely from the latest bull market and now have decided that it is time to cash out. They may be right, but we disagree for several reasons. While we admit that valuations are historically high, we do not believe that valuation alone is an effective market- timing tool. In fact we believe the real money is made by identifying the long-term price trend and sticking with it, not trying to anticipate its change.
Further, we believe trend analysis is more a technical exercise, not a fundamental one. Therefore, to forecast a change in trend we would rather rely on signals from the market, rather than the economy. To signal a change in trend we would look for a halt in upward momentum before the price trend turns down.
That would involve a correction in price that at least broke the lower bounds of the current trading range, now around 2000 to 2050 on the S&P 500 Index.