"It's a bull market, you know."

In early June of last year, Stillpoint posted a blog entry here to the effect that a new bull market had begun in stocks. The basis for this claim was that the S&P500 index had moved above its 200-day moving average and had refused to move below it. Nothing has occurred since then to contradict this assessment. Indeed, since that blogpost was published, the total return of the S&P500 index fund (SPY) is up over 30%.

Screenshot 2021-04-25 193011.png

In this respect, the equity markets have illustrated a timeless principle of market speculation, one immortalized in Edwin Lefevre’s Reminiscences of a Stock Operator. Aside from this principle, investors should know that this book is essential reading for any serious market participants. Additionally, it’s one of the finest memoirs I have ever read of any kind.

Reminiscences of a Stock Operator depicts the career of Jesse Livermore, a colorful and successful American trader in the early twentieth century. The principle the book illustrates in this context derives from a conversation Livermore overhears between two other traders, Elmer Harwood and a Mr. Patridge, also known as “Old Turkey.” Here is the conversation:

Elmer: “Mr. Partridge, I have just sold my Climax Motors. My people say the market is entitled to a reaction and that I’ll be able to buy it back cheaper. So you’d better do likewise. That is, if you’ve still got yours.”

Turkey: “Yes, Mr. Harwood, I still have it. Of course!”

Elmer: “Well, now is the time to take your profit and get in again on the next dip,” said Elmer, “I have just sold every share I owned!”

Turkey: “No! No! I can’t do that!”

Elmer: “Didn’t I give you the tip to buy it?”

Turkey: “You did, Mr. Harwood, and I am very grateful to you.

Elmer: And didn’t that stock go up seven points in ten days? Didn’t it?”

Turkey: “It did, and I am much obliged to you, my dear boy. But I couldn’t think of selling that stock.”

Elmer: “Why not?”

Turkey: “Why, this is a bull market!” (The old fellow said it as though he had given a detailed explanation.)

Elmer: “I know this is a bull market as well as you do. But you’d better slip them that stock of yours and buy it back on the reaction. You might as well reduce the cost to yourself.”

Turkey: “My dear boy, if I sold that stock now I’d lose my position; and then where would I be? And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don’t feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It’s a bull market, you know.”

What Livermore gleans from this conversation is essential information to any investor. Its essence is that once a trend has asserted itself, in this case a bull trend, the investor is better off riding it instead of selling when prices seem to be overextended and buying it back cheaper. For longer-term investors, which is what most of us are, the message is not to miss the big picture, the overall trend, and try to maneuver around market noise.

As Livermore put it,

“Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks. Then get out of all your stocks; get out for keeps! You have to use your brains and your vision to do this; otherwise my advice would be as idiotic as to tell you to buy cheap and sell dear. One of the most helpful things that anybody can learn is to give up trying to catch the last eighth-or the first. These two are the most expensive eighths in the world.”

Notably, market participants were skittish a year after the beginning of the last bull market in March 2009, worrying that the bull market would end, and a nasty bear market would return, as it had in 2008. But that isn’t the way the business cycle usually works. Bull markets typically last for years, while bear markets are much more short-lived. It’s not that bear markets should not be feared—obviously Livermore did not feel that way—but that it pays to know the general trend of the market, regardless of what may be occurring in individual stocks on a short time frame.

By now, almost no one would doubt that the new bull market that started in March 2009 continued one year later and beyond. Many agree that the same bull market did not end until last year’s short bear market in February and March 2020. As it turns out, Ryan Detrick of LPL Research has shown that the inception of the new bull market in March 2020 looks remarkably similar in performance to that of the bull market that started in March 2009.

Detrick Chart.png

It’s not that there won’t be dips and corrections during a bull market because there always are. Instead, the crucial investing principle is to know that it pays more to ride a bull trend that it does to trade around market fluctuations.

At some point in the future, stocks may dip below their 200-day moving average, and they may stay there, refusing to reassert the bull trend. At that point, the bull market will be over, and it will make sense “to get out for keeps,” as Livermore put it. But that time is not now.