The S&P is close to all time highs.

Well that must be good news,  maybe we can look forward to S&P 3,000 this year or next year at the latest ? – I don’t think so !

By many historically reliable measures the S&P it at or close to its most overvalued level since the 1929 and 2000 peaks – and yet it keeps going higher.

Perhaps this time it REALLY is a new paradigm? – forgive my humour !

We are now in the second longest Bull market since the 1920’s and sadly all Bull markets come to an end ….eventually. Here is the kicker, when a Bull market ends typically it gives back around 50% of the previously made Bull market gains. On the S&P that equates to about a 30% fall from current levels. This is not the worse case bear market scenario this is just a run of the mill, ordinary, average typical decline.

Furthermore there is a correlation between the size of the preceding Bull market and the subsequent Bear market decline that follows. Ie the nastiest Bear markets follow the most exaggerated Bull markets. Many informed professionals are talking of a decline closer to 40% or 50%  when the music stops on this one.

To quote Baron Rothschild   “ I always bought too late and sold out too early” meaning of course that he would take the “safe” chunk out of  the middle of the Bull market and leave others to try and pick exact bottoms or tops.

Because profits and losses are asymmetric in such situations a 30% loss takes a previously made 100% gain and reduces it to  just a 40% gain

So a market that rises from say 100 to 200 (a 100% gain) will then hit 140 after a 30% fall.

Whilst a 50% loss will take a 100% gain back down to ZERO (100 up to 200 then less 50% = 100)  . Ie a 50% loss will take back all of the profits earned in the entire previous Bull market run.

Don’t think that can happen?  Well let us not forget that it has already happened (more of less twice since)  in the last 16 years.

So what is the message in this doom and gloom post.

Well for those that trade their pension or  ISA’s or other significant accumulated capital the message really is that often it is not worth hanging in fully loaded trying to pick the exact top in an ageing bull market. As Barron Rothchild new all too well even somebody who gets out wayyyyyy too early say 20% before the eventual top will do a lot better than somebody who rides the trend all the way up and all the way down again.

Buy and Hold is always touted as the best route. But almost invariably by those that have a vested interest in keeping you fully invested  – such as the fund managers. How can a fund manager who earns his living from investing funds ever suggest that you are better off out of the market ?

So am I saying the S&P will immediately plunge tomorrow morning. Not at all but what I am betting is that by the end of this full market cycle (1 bull market + 1 bear market) we will certainly be seeing these prices and indeed much lower on the way down the other side of this particular  mountain. This is the time to become more defensive in anticipation of what most definitely is coming.

Reminds me of that old joke that if the light at the end of the tunnel is not an oncoming train then it is probably the Taxman’s Torch !  Well in this case it is a Bear market and it is thundering straight down the track at us.