Long-running bull markets makes many an investor wary because it seems as Newton’s Third Law states that for every action in nature there’s an equal and opposite reaction. So one would think surely a bear market is on its way.
For any evidence that this is so it is best to watch for signs that a bullish market is at its peak. The final stage of a bull market is overly jubilant behaviour marked by excessive speculation or more precisely when an Index has fallen by 20% or more.
But it impossible to predict when a bear market is going to happen.
The most obvious signs of a peak bull market is the surge in optimism accompanied by lots of activity in the market that means everything from more media stories and waves of share buying.
Other signs that the market may be at the top are more mergers and acquisitions (M&A) in a ‘fashionable’ sector. Ironically enough, you see more of M&A activity at the top of a market than you do at the bottom, according to Mark Dampier, head of research at Hargreaves Lansdown.
Another sign is if your friends who held zero interest in investing suddenly want to talk about the latest technology stock or worse, tell you that this investing lark is really easy and you can make 20-25% in a week.
This is reminiscent of tech stocks in 1999 and 2000 during the Great Internet Bubble and if you’re old enough you may remember the failures of Boo.com and lastminute.com, although recovery happened for the latter.
Exuberance back then was not built on anything solid such as valuations that reflected earnings. Share prices fell like lead balloons and companies went bust.