How Bull Markets Work

Much has been made about the age of the current bull market, which started to run in March 2009 and has been raging now for more than 2,600 days.

That makes it the second-longest such run in market history.

But there’s something you have to know about the last seven-plus years…and every other period of sustained stock-market gains…

It’s a dirty little secret, obscured by talk of pure length of time…

Bull markets move higher in fits and starts.

It’s the proverbial “one step forward, two steps back.”

Or, more realistically, it goes like this: three steps forward (suddenly)… one or two steps back (slowly).

Let me first show you some numbers to illustrate what I mean. And then I’ll explain how this “fits-and-starts” phenomenon affects most investors… and how you can get the most from the market by embracing it.

Here’s a table showing returns of the four major U.S. stock indices, for four distinct time periods – between November 8 (Election Day) and today:

As you can see, there’s a significant difference between the first and third time periods (shaded green) and the second and fourth (shaded grey).

U.S. stock indices made strong gains during those “green” periods – 8.3% in 24 days and 5.2% in 18 days. That’s the “three steps forward (suddenly)” part of the fits-and-starts cycle I’m describing.

Meanwhile, stocks went nowhere but sideways during the other two “grey” periods – gaining just 0.6% in 34 days and 0.8% in 46 days. And those averages were buoyed by the Nasdaq 100… the other three indices were flat or slightly negative.

That’s the “one or two steps back (slowly)” part of the fits-and-starts cycle I’m talking about.

Now, these numbers alone show a basic truth about bull markets: There are long periods of time when stocks are boring… punctuated by briefer periods of time when stocks march (or shoot) higher.

Knowing this truth, you should be prepared to do three things:

  1. Stay invested most of the time (as long as the trend is up),
  2. Keep a portfolio of diversified plays, and
  3. Stay patient during the “one or two steps back (slowly)” phase of the cycle.

Point #1 ensures that you’re already into position when the bullish, “three steps forward (suddenly)” phase appears without notice.

Point #2 is, well, just Diversification 101 and plain common sense.

Point #3 addresses the behavioral aspect of investing.

That is, your behavior – particularly during the tough times – dictates your success or failure. You’ve got to keep calm and collected during the “two steps back”… to ensure you’re in the game when the “three steps forward” rally unfolds.

Where Are We Now?

Essentially, we’re still in the “one or two steps back” phase that began around March 1.

U.S. stocks are at or near their highs, but we haven’t seen a strong, “three steps forward” rally in a while.

The pullback phase has been slow and orderly… which is just the type of pullback you want to buy into.

That trading wisdom that says “never short a dull market” – that’s because strong, “three steps forward” rallies tend to appear suddenly once the market has sufficiently lulled everyone to sleep.

Remember…

Bull markets make you money… but you’ve got to be “in it to win it,” as we say.

That’s why Cycle 9 Alert is designed to help you…

  1. Stay invested most of the time (as long as the trend is up),
  2. Keep a portfolio of diversified plays, and
  3. Stay patient during the “one or two steps back (slowly)” phase of the cycle.

Click here to learn more about how you can profit from the market’s fits and starts.

To good profits,

Adam O’Dell
Editor, Cycle 9 Alert
Follow me on Twitter @InvestWithAdam

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Categories: Investing

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.