Is This Bull Market As Good As It Gets?

We are in a bull market. And there’s only one thing we know for sure about bull markets… They must eventually come to an end.

Now, don’t worry; I’m not saying our current bull market is about to come to an end. There is no way to know when the end occurs except in hindsight. But based on history, the end of a bull market is inevitable.

You may often hear that the end of a bull market occurs when there are no more buyers. Of course, this isn’t a literal statement. There are always buyers and sellers in any market. What traders mean when they say this is that prices go up when buyers act with greater urgency than sellers.

In the recent weeks, according to media reports, individual investors have been acting with some degree of urgency… but not by buying. One way to quantify that is shown in the chart below.

Source: The Wall Street Journal

The chart shows that individuals have been reducing their buying. Although net inflows are still averaging more than $1 billion a day — much more than individuals were spending in 2019 — it’s the lowest level seen this year.

The Wall Street Journal noted, “On March 26, individual investors purchased about $772 million of U.S. equities on a net basis, a 60% decline from the almost $2 billion reached in just one day on Jan. 29, at the height of the meme stock craze. The last two times that equity purchases by individual investors were lower were Christmas Eve and the Friday after Thanksgiving of 2020. Both days tend to see lower volume in the stock market.”

Interest in peaked at around that same time.


What This Means

One reason for the decline in buying could be the lack of gains. The report indicated that, “since mid-February, the average nonprofessional investor has underperformed the S&P 500 by about 10%.”

Now that new individual investors are learning that markets move down as well as up, there is a risk that the market is running out of urgent buyers. If these individuals who added billions of dollars to the market this year decide to sell as suddenly as they decided to buy, there could be a sharp selloff in the market.

[Related: Are We Near A Top? Here’s What I Think…]

This is another problem that we need to watch, and my Income Trader Volatility (ITV) indicator is an ideal tool to monitor this. The chart below shows the NYSE FANG+ Index, an index that includes Facebook, Apple, Netflix, Google-parent Alphabet, Tesla, Microsoft, and many other favorites of individual investors. This index can be especially volatile, so I’m using a daily chart.

ITV is similar to VIX in that it rises as prices fall. You can see that the ITV (red) signaled the top when it crossed above the moving average (blue) and then turned bullish at the bottom. If ITV remains below its MA, additional gains are likely. This is an important indicator to watch, and I’ll be following it closely.

Action To Take

We don’t know exactly when the bear market will come, but we can be prepare for it. That’s why I’m remaining conservative by making trades in stocks with relatively low volatility.

This week, I searched for low-volatility stocks because this is the beginning of earnings season and I believe that is another risk to consider. This is expected to be one of the best quarters on record. For the first quarter of 2021, analysts are projecting earnings growth of 23.8% for the companies in the S&P 500. Next quarter is expected to be even better with expected earnings growth of 52.5%.

Even with these earnings, the S&P 500 remains overvalued on fundamental measures. The price-to-earnings (P/E) ratio based on expected earnings is about 22, well above the 10-year average of 15.9.

This means we could see a selloff begin as traders realize earnings might be as good as it gets. Using stocks with low volatility makes sense as we await the reaction to the first earnings reports.

In the meantime, I’m sticking to my time-tested strategies that work in any market and pay my readers and me with immediate income — week in, week out.

For example, one of the strategies I use works like an “insurance” policy — protecting us, while still giving us the chance to profit.

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