Monday, March 17, 2014

Phase Two of a Bull Market - The Wall Worry Phase

This middle stage is where the general public becomes aware that this new market is moving higher. It is also typically the longest of the three phases. The financial and stock reporters on TV start to cover this new sector and interview the experts. To make it "fair" they find someone from each of the bull and bear camps. Each expert has a compelling argument as to why the other "expert" is wrong and why the price of this new market should go in the direction that they think it should. The investing public usually finds it difficult to take action at this point because there is so much uncertainty. They have just recently become aware that this market is moving higher, but in the back of their minds they keep remembering that not too long ago this market was going down year after year and they keep thinking of the "arguments" as to why investing in this market is risky. Examples of this phase include the stock markets in the mid-to-early 1980's and mid-to-early 1990's. Most of the public was aware that the stock market was making gains but were slow to aggressively invest in it because the pain of the past bear markets were still fresh in their minds.

The term "wall of worry" refers to the saying that "A bull market has to climb a wall of worry but a bear market slides down the slope of hope". This is an important concept to understand. We will discuss the bull market side of this saying first and then discuss the bear market side later in this article. As a bull market is advancing it doesn't feel good to the investors during this phase. The naysayers are everywhere publicly explaining away the recent advances in this market and explaining why this investment class will soon drop away. An investor that chooses to invest anyway has to decide for themselves that this is where they want to be, invest, and hang-on. Only after several years of consistent gains do the naysayers start to lighten up on their negativity and allow the participants to start feeling good about the investment they have made. When the media combines this new upbeat attitude with a chart of the gains that have happened so far then the mood shifts for the better and we enter the next stage.

- Source, Mike Maloney's