DJIA Bull Markets and Contrary Indicator

The table below lists the five largest Dow bull markets as of August 14, 2014 (source: WSJ).

 

Longest Dow Jones Industrial Average Bull Markets

 

Period  (days)	Gain
6-13-1949 to 12-13-1961  (4,565 days)	355%
10-11-1990 to 1-14-2000  (3,381 days)	396%
8-24-1921 to 9-3-1929  (2,931 days)	497%
3-9-2009 to 8-13-2014  (1,982 days)	154%
8-12-1982 to 8-25-1987  (1,838 days)	250%

 

These types of bull market tables rarely include any kind of explanation as to what market conditions were just prior to the prolonged run-ups. For example, if the Dow was down 52% and then climbed 105%, it would still be at a level below its pre-52% drop.

 

In the past, stocks have taken a big beating after market euphoria turned to reckless investing. Markets are less likely to fall apart when investors are acting cautiously. One of the best indicators may be one from Merrill Lynch; the indicator measures Wall Street strategist bullishness. It is a contrary indicator. When a high percentage of the strategists are bullish, it may be a good time to sell. As of mid-August 2014, the Merrill indicator was at a level suggesting the market may gain an additional 98% before a major bear market.

 

As of mid-August 2014, Wall Street strategists were recommending investors hold 51% of their portfolio in stocks, a figure below the 60% average over the past 15 years. It is also well below the 66% peak when stocks subsequently started to tumble in 2007. For Merrill, any average recommendation below 54% is a buy signal. The Merrill indicator forecasted a 30% gain for the S&P 500 for 2013 (making it a top forecaster for that year).

 

Merrill also tracks money manager exuberance (who were also bearish as of August 2014). Merrill’s surveys show these managers have 5% of their stock portfolio in cash, the most since June 2012. Mutual fund data provides a similar contrary indicator.