THERE ARE A NUMBER OF WAYS TO (TRY TO) IDENTIFY THE END OF A BULL MARKET. It's usually easy only in retrospect; in real time, it's often pretty hard to do. The great Dow Theorists – Charles Dow, William Hamilton, Robert Rhea, Richard Russell – all wrote about the signs of speculative excess as the market reaches its ultimate peak. In a bull market, prices outrun values. In its final stage it is discounting possibilities only (Hamilton). The low-priced 'cats and dogs' historically make great moves (Russell). The opinions of newspaper writers, services, and brokers are rampantly bullish (Rhea). Veteran traders look back at those months and wonder how they could have become so inculcated with the "new era" view as to have been caught in the inevitable crash (Russell). Dow himself observed that bull markets normally run 4-6 years, with Rhea suggesting that approaching the far end of that range (6 years) alone is reason enough to expect the beginning of a bear market, providing speculation is then rampant.
This last thought connects to the idea of the three psychological phases of a bull market. As Russell wrote over fifty years ago: Phase one is the rebound from the depressed conditions of the previous bear market. Here stocks return to known values. In the second and longest phase, shares advance in recognition of improving business and a rising economy. During the third phase they spurt skyward on the hope and expectations of a continuing rosy future. This is the traditional period of great prosperity and unbounded optimism. It is here that the public enters the market wholeheartedly for the first time. Rhea commented that the third phase is: … when speculation is rampant and inflation apparent and observed that The final stage is sometimes recognizable because people ... Consider it old-fashioned to regard earnings or prospects.
Therefore, one wonders exactly what qualifies as writers being "rampantly bullish"; what constitutes "great moves" in the cats and dogs of Wall Street; how do we quantify "rampant speculation"; and how do we know that veteran traders have been "inculcated with the 'new era' view"? A related thought is that of "the last bear throwing in the towel" — the idea being that when a savvy market man who has steadfastly resisted the market's speculative allure finally turns bullish – well, that's often a sign of the top. In the last couple of months, we've seen a bit of that, as several big name Bears have finally "thrown in the towel," averring that the market has, upon further reflection, much higher to go even from these rarified levels!
[See Also: U.S. Equity Bull Market: Is the End Near?]
That (the final capitulation of the biggest Bears) could well be the loudest tolling of bells signaling the Bull's end - except that even this is subjective and hard to measure! It turns out that market observers noted this "last Bear throwing in the towel" phenomenon many months ago. Even as far back as early-2013, the Internet reminds us that the market must be topping out because so-and-so big name Bear finally turned bullish. And here we are, two full years later, with the market 35% higher… This "identifying a market top" thing is tough indeed!
Are we entering this bull market's third psychological stage, or have we already been in it for the past two correction-free years? That's a big question in my mind, and to be honest – I'm just not sure. One interpretation is shown on the following chart of the Industrials. The bull market's first phase, a "return to known values," seems pretty clear here. The next couple of years may represent the second phase, with prices gradually moving higher in recognition of gradually improving economic fundamentals. That would leave the last two years – of prices marching uninterruptedly higher – as our third phase of "rampant speculation" and regarding earnings as old-fashioned. And this takes us up to six total bull market years, which typically is about as old as bull markets grow.
But we might just as easily see the entire period since the end of 2010 as this market's second phase. After all, the last couple of years don't seem dramatically different from the two that preceded; no sharply steeper rate of ascent since the beginning of 2013, for example. Under this second interpretation then, the market's third phase and biggest rise still lies ahead, with a six-year lifespan for bull markets merely a suggestion, not a mandate.
So no – none of this gives us a convincing answer. Thus our best bet, by far, is to look for a clear Dow Theory sell signal, confirmed by a clear sell signal from our Primary Trend Index (PTI). Neither of those will get us out at the very top, but taken together they have kept us in this market all (or most of) those six years – and that's pretty impressive. A definitive Dow Theory sell signal seems rather distant at this point; we'd need to drop more than another 10% from current prices to even entertain such a possibility, in my opinion.
As for the PTI, the first sign of danger could come from a break below the moving average (identified by the small maroon oval). A true sell signal, however, would require a break below October's infamous lows (middle oval); but just to be sure, I'd want to see the PTI drop below its August lows (the final oval on the left). Thus, we have identified the criteria for a possible end to this bull market, but such an ending is hardly imminent and the Bull remains in charge for now.
The above content was an excerpt of Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
