Being able to accurately spot the beginning of a bull market can be one of the most lucrative skills around. This fact alone makes it difficult to achieve, as so many well-educated and experienced investors try to spot the signposts that lead us into traditional bull markets.
Let’s look at five signs that tend to predict the next bull market. No single one is a surefire tip, but that’s just the way Mr. Market likes it: he has a nasty habit of eliminating patterns and keeping investors mystified for as long as possible.
1 – Sector and industry leadership changes in the stock market.
In the most basic sense, bull markets come when more people want to buy stocks than sell them. Because stocks love to turn bullish before the broad economy picks up, look for a shift in demand to the stocks that benefit first from economic growth. Stocks in sectors like financials, industrials and retail often lag behind in a bear market – nobody wants them.
When a bull is approaching, these sectors often become market leaders. Large institutional investors start piling in, hoping to see the conditions of these companies improve first. So look for leadership to change from defensive sectors like utilities, healthcare and consumer staples. When investors start dumping the latter in exchange for financials, industrials and basic materials, it’s a good sign that major investors are optimistic about the future.
2 – Key economic indicators turn upward.
We get a slew of economic indicators all throughout the year, but several have been deemed leading indicators for their ability to foretell future growth in the all-important indicator of gross domestic product (GDP). When GDP is positive and growing, the bull market is already in.
3 – Money market fund assets drop.
When investors are generally skittish, they sell their risky investments (stocks) and move cash into safer ones like bonds and money market funds. In a bear market, money market fund assets will rise and rise, building a bubble of pent-up demand. After all, money market funds may be safe, but they won’t earn you a solid return.
Look for a sustained drop in money market fund assets, and a corresponding rise in stock fund assets. This will signal that investors are making their way back into the stock market. The higher that money market assets grow in a bear market, the more gunpowder is available to fire back into the stock market when the bull is back.
4 – Stock indexes stabilize.
This last sign may sound overly redundant, but don’t be fooled by its simplicity. Stock market indexes need to form a bottom that can be recognized by all participants. They then need to form a stable upward trend over weeks and months, rather than a volatile zig-zag that threatens to turn south just as much as north. The more stable the trend of the broad indexes the more confident investors can become, especially those who have been patiently waiting on the sidelines for obvious signs of safety before dipping their toes back in.
Parting Thoughts
Don’t be afraid of missing a few percentage points of stock returns in your efforts to safely and accurately spot a bull market. The best bull markets last for years, not months, and you’ll sleep far better at night if you’ve developed strong convictions about your investment. Leave the whipsaw trading to the iron stomachs of the world, and take your time in evaluating all the signs.
