The Bull Market Is Still Healthy... But Expect Volatility

It makes sense to be a little worried about the market today...

Investor euphoria keeps pushing the market higher, and valuations keep hitting new peaks.

Eventually, the market will take a breather. Stocks will fall 5%, 10%, or even 15%... That's just normal market behavior. Corrections happen all the time, even in bull markets.

One basic sign of a healthy bull market is whether more stocks are going up than down. The "advance/decline" line shows us this.

It's a simple measure – one we'll check on today...

The advance/decline line takes the number of stocks that went up in a given day and subtracts the number that went down. If more went up that day, the line goes up. If more went down, the line goes down. The advance/decline line is also cumulative over time.

In a typical bull market, as the market goes up, the advance/decline line goes up, too. But when the advance/decline line moves lower while the market continues to move higher, then it's time to worry. It means the gains are concentrated in only a few companies.

That's exactly what happened in the late 1990s. And as longtime DailyWealth readers know, the dot-com bubble burst shortly after.

Today's advance/decline line looks nothing like the late 1990s. The market is up, and so is the advance/decline line. This metric tells us this bull market is still healthy.

This is a bullish sign for the market over the next few months. But again, that doesn't mean stocks won't fall from here.

Even in raging bull markets, you can still see volatility.

In mid-December, I told subscribers of my option selling service Retirement Trader that they should expect plenty of volatility in 2021. Here was our "market outlook" for 2021...

We'll call ourselves "cautiously optimistic" because there are still plenty of reasons to worry. The market won't move in a straight line up.

First, we'll have to get through the next few months as positive COVID-19 cases continue to remain high. More states might shut down their economies. And that will lead to more people out of work and more businesses closing for good.

You also have to consider how rich today's market is. The S&P 500 Index trades for 28 times earnings. Over the past four decades, the index has had an average price-to-earnings ratio of only 18.

Just on valuation fears alone, we could see some profit-taking sending the market lower.

The point is that we expect the market to finish higher over the next 12 months... but we expect plenty of price swings along the way. It wouldn't surprise us if there were a few corrections of 10% or greater in 2021.

Today, the S&P 500 trades at more than 30 times earnings. Prices have kept rising, too...

Over the past three months, the index is up more than 10%. In a normal year, that's a whole 12-months' worth of gains. And that has just been the past 90 days.

It may feel like the market is going to keep climbing forever, but that's not going to be the case. Expect volatility.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig

Editor's note: We're nearing a "make or break" point for the markets... So now is the time to make sure you're on top of your investments. Last night, Doc, Steve, and Austin Root sat down to share their thoughts on what's happening now – plus, they gave away the tickers for their No. 1 stock picks in the coming year. If you missed it, you can still watch their discussion here.

Further Reading

"Major volatility is a hallmark of a stock Market Melt Up," Steve writes. We've seen minor corrections of 5% and 10% already in the current bull market. And if you want to ride the Melt Up as long as you can, you need to be ready for a few downturns... Read more here: The Melt Up Is Never a Smooth Run Higher.

The market can be a little crazy, even in the best of times. And even though we've seen some corrections so far, a combination of factors is set to send stocks even higher from here... Get the full story here: Stocks Can Soar Higher Than You Probably Imagine.

Market Notes
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