Mark Hulbert has expressed serious doubt about the stock market’s ability to continue it climb upward.  As the Dow touches the magic 14,000 mark, it hesitates, pulls back slightly, and then tests that ceiling, only to repeat the process. Much is being made in the news that this is a “new high” in the Dow and things can only go higher: “the most bullish thing the market can do is move higher,” say some. Not Hulbert:

Consider 1987, arguably the period over the past three decades most relevant to the Great Rotation argument today. Then, as now, a bull market was getting long in the tooth. Beginning in April of that year, following more than 60 months in which fund investors had invested an average of nearly $4 billion a month of new money in bonds, they reversed course in a big way. Over the next six months, according to the ICI data, fund investors withdrew an average of $3 billion a month from bond funds.

I was there when that happened. I got lucky. I was nervous. I had one client with a substantial amount invested in stock mutual funds that I was “managing.” I was a neophyte. I didn’t really know what I was doing, but she trusted me.

I didn’t like the looks of the market. I was no market technician. I didn’t know about charts and graphs and moving averages and money flows and technical indicators. I just smelled something coming. Just because the market was moving higher didn’t mean that it would continue to move higher.

In late August I moved her accounts to cash. It was simple: I just called the mutual fund company and using the authorization she had given me I requested that they liquidate her stock mutual fund and move the proceeds into a money market fund.

And I waited. The market continued to move higher…and higher…and higher.

And then, on Monday morning I was in another client’s office and she asked if I had seen what was happening in the markets. I said, no, I didn’t. She said the market was off 500 points. 500 points? The previous Friday the market closed at 2700 on the Dow. A 500 point drop was almost 20 percent!

My blood ran cold. I smiled, and left her office as fast as I could. Sure enough, the market closed that day at 2200. Margaret’s account was safe! I had saved her from a 20 percent loss.

I used that story dozens of times over the next several years as I explained how sidestepping such declines were worth years and years of taking risks in the market. Sometimes it’s better to forgo small gains to keep from suffering large losses. With God’s help that message helped me build my market timing business to $15 million over the next several years.

Back to Hulbert:

As market historians recall, the that year topped out in August, four months after that trend reversal. And the 1987 crash — the worst one-day drop in U.S. stock-market history — occurred two months after that.

After riffing on the hypothesis that the “flow of funds” into and out of the markets portends a top in the Dow, Hulbert then quotes another guru for confirmation:

If these patterns are any guide to the future, now might be the time to pull back from rather than dive in. As Russ Wermers, a University of Maryland finance professor and one of the authors of the research presented at the
December conference, puts it: “For most investors, the more proper response to the fund flow premise of the Great Rotation argument is probably to reduce equity exposure rather than allocate new sums to equities.”

A drop of 20% in over the next couple of months is highly unlikely. I’m just saying…

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