As the stock market makes new highs, there are many reasons to worry that the fall could be particularly hard when it comes. I’m no permabear and have not been constantly arguing a bear market is around the corner. Even if I haven’t been the biggest cheerleader of stocks I have been an advocate. For example in August of 2011 I wrote about how, despite negatives, stocks were the best investment options available to most and in my February post this year I argued that despite rising risks investors should continue to hold stocks and a decline was unlikely to transpire until 2014. At the same time, starting in May of this year, as the stock market kept making new highs, I began to argue that risks in 2013 were rising and investors should use the strength to raise cash levels and sell some stocks, particularly money involving a low risk threshold and time horizon. As I look at where the stock market stands at the end of the year, I continue to believe the risks of a bear market being sooner rather than later have only grown.
Investors are pouring money into the stock market. As the market makes new highs, they’re on track to allocate the most money into stocks since 2000, right before that market rolled into a bear market. The so-called dumb money is often late to the party, as most investors buy at highs and sell at lows. Dumb money rushing into stocks is just one more bearish sign in this almost five-year old stock market. But as many short sellers have found, as this market keeps making new highs, famous economist John Maynard Keynes was right when he proclaimed the market can stay irrational longer than you can stay solvent. Bears actively betting against this market are getting killed. No matter how negative the fundamentals, betting against a trend is a good way to go broke. So, now might be a good time to consider what signs will indicate the current bullish trend has reversed, and the time has arrived to head for the exits.