Markets Still Don’t Flop from the Top by, D. R. Barton, Jr.

An object in motion tends to remain in motion until acted on by an outside force.
–Simplified version of Newton’s First Law

My Grandma Seymour was a gracious woman. A Godly and wise woman. A woman of exceptional beauty. People often mistook her as my Mom’s sister – much to Mom’s chagrin.

Above all, she was the quintessential southern matriarch. She ruled our family not so much from a position of authority (which she had) but rather from a position of repeated wisdom and gentleness – thus garnering and maintaining everyone’s respect.

When I grow up, I want to be just like her.

Breakfast Feasts

When anyone stayed at Grandma Seymour’s house, they were awakened by the smell of a southern breakfast feast.

Scrambled eggs. Southern biscuits and sausage gravy (or red-eye gravy if you preferred). At least three varieties of homemade jellies and jam. Homemade apple butter. Sausage patties. Tomatoes – always tomatoes.

And then there was the star of the show – her country ham. If you have never eaten country ham, you are missing out on one of life’s delicacies. It may be my son’s single favorite food: ham cured with salt and sugar – a close cousin of prosciutto, though cut into thicker slices.

Why am I telling you about all this? This ritual feast was every breakfast I had at Grandma’s house – ever. As I grew older and would go to see her by myself, I expected something might be different – something less expansive for just the two of us. But the number of people eating, her advancing age, or how much in a hurry I might have been on a particular morning – mattered nothing to her. She served the whole feast every time

If you stayed the night with Grandma, you got the full breakfast. Period. In time, I learned to never expect anything else . . . which brings us to our current markets.

US equities are grinding up. Again. Despite it all. And markets in a slow grind up typically stay in a slow grind up for longer than most people expect. Just like wondering what’s for breakfast at my Grandma’s house – why expect anything different? And yet tons of people keep expecting markets to go down. Some are even calling for a major top any day now.

Let’s discuss some scenarios by first remembering the old saw …

Markets Will Do What They Want but Expect Them to Act Like They Usually Act

Let’s start with a fundamental premise that markets just don’t flop from the top. Said in a less kitschy way: markets tend to make rounded tops before their biggest drops. Let’s look at some recent examples that most everyone will remember.

First, we’ll start with the Dot.Com Bubble:

Next, we had the Real Estate and Debt Bubble in 2007 – 2008:

We had the summer of 2011 when Standard & Poor’s downgraded U.S. credit in the midst of the European debt crisis:

Even the fastest -30% drop in U.S. market history last March gave us a check-back pop during the early stages of the freefall:

And here we sit today, just a few ticks away from making this year’s 16th all-time high in the S&P 500. If you find that thought worrisome and maybe you think the market has moved too far, too fast, then the folks over at LPL Financial Research want you to consider this chart:

The chart shows new highs come in clusters that can last more than a decade. From the perspective of historic trends, our current “new highs” train is a mere nine years old. If markets continue to act like they usually act, we could have years of gains still to come.

The Bottom Line

Far be it for me to give any absolutes for people trying to decide what to do with money right now but just ask, “Why fight a market that’s actively trying to hand money to long side investors and traders?” Bailing out on longer-term positions when the market keeps ticking off new highs makes little or no sense for now.

Granted, we have bearish issues buzzing about like potential tax hikes, the emerging Cold War with China, and an uncertain recovery timeline from the pandemic. Still, the dominant narrative is – and will continue to be for some time – an abundance of monetary and fiscal stimulus. Loads of stimulus money provides a safety net under the market and makes for a slow rising tide – an environment where I find swimming relatively easy.

I love investing long-term money in these grinding bull markets where the pullbacks are opportunities to put new money to work at a discount. Meanwhile, so many people hesitate or look for reasons that the most recent high was “the top”. As Peter Lynch famously observed, however,

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

Staying on the right side of the market is not always easy but when you expect the markets to act like they usually act, you can keep riding the moves up. Also, have a plan in place to protect your capital when the inevitable big pullback comes. Just don’t pull the ripcord before a full correction actually starts …

I always love to hear your thoughts and feedback – just send an email to drbarton “at”

Great trading and God bless you,
D. R.

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