Missing a market run-up is not something investors desire. It makes them feel left out, nobody enjoys that feeling. But how do you know when it’s time to move money back into the stock market after a big decline, like in late 2008 for example. Tom and Brendan talk about just that in this week’s Mullooly Asset Management podcast. They explain how we try to ensure our clients don’t miss market run-ups. The underlying theme of our work here is supported by the concept of relative strenth. Relative strength is something our friends at Dorsey, Wright and Associates have taught us a lot about.
Dorsey, Wright and Associates have taught us that relative strength illustrates which charts are moving up faster or slower than the market or their peers. We can run tests pitting one chart against another to measure their relative strength. It’s essentially a big arm wrestling match, where the winner displays superior relative strength to its adversary.
So how does relative strength help make sure you don’t miss market run-ups?
One of the long term indicators we rely on here at Mullooly Asset Management measures the relative strength of the S&P500 vs the bond market. Using the 2008-2009 time period as an example, we can show the value of relative strength. The relative strength chart of the S&P500 vs the bond market gave a sell signal in July 2008. When this chart gives a sell signal, it tells us that bonds are favored over stocks at that particular time. As we now know, July 2008 was a crucial point to be getting out of the stock market.
That’s great, but how does this chart let us know when it’s time to get back into the market?
This chart remained on a sell signal until June 2009. It then gave a buy signal, meaning that stocks had returned to favor vs bonds. As we know, the current bull market began in March of 2009. So the June 2009 buy signal on the S&P500 vs the bond market chart was a good indicator that it was time to move back into stocks. Relative strength is never going to get us in at the very bottom or out at the very top, but it does give us an accurate illustration of strong market trends. This is what makes relative strength a valuable tool in our arsenal at Mullooly Asset Management.
Tune into this week’s Mullooly Asset Management podcast to hear more examples of how the relative strength chart of the S&P500 vs the bond market has given us clear signals as to when stocks or bonds were in favor respectively.