The longest bull market rally in history has further to run – but investors may wish to start to build cash positions before next year.

The message from Tom Elliott, deVere Group’s Senior International Investment Strategist, comes after the S&P 500 index reached a new all-time high late August, and recorded its longest ever rally (which began in March 2009).

Mr Elliott comments: “Wall Street is celebrating the longest stock market rally in history. One suspects it has further to go, given that the current defining features of the U.S. economy - strong growth and a cautious Fed - are an investor’s dream.

“This happy combination can be seen in last week’s upward revision to second quarter U.S. GDP growth estimates, to 4.2%, which comes just a week after Fed chair Jay Powell promised caution over the pace of interest rate hikes next year in his address at Jackson Hole -- although he did as good as confirm two more rate hikes this year, in September and December.

“Furthermore, global stock and credit market valuations are more attractive than at any point this year, thanks to corporate earnings growth outpacing share price growth.”

He continues: “But while the outlook for Wall Street over the coming months appears good, as we go into 2019 investor sentiment towards the U.S. stock market may change sharply.

“Cautious investors may want to start building up cash positions, and so take advantage of any sell-off.

“After all, the Fed’s caution is justified: many economists suspect that behind the current GDP growth spurt are temporary boosts to the economy, such as tax cuts and strong exports of goods ahead of the imposition of counter tariffs by America’s trading partners.”

He goes on to say: “Then we have political risk, whether over trade negotiations, North Korea, Iran, and the risk of the impeachment of Donald Trump, should the Democrats win control of the Senate in the mid-term Congressional elections.

“But perhaps the biggest risk to investors is the steady draining away of global liquidity, as central banks end or - in the case of the Fed, actually put into reverse - their quantitative easing policies.”

Mr Elliott concludes: “A diversified multi-asset portfolio remains the best protection against unpredictable markets.  This should contain exposure to global equities and bonds, with property, gold and cash also included. After all, a 2% return on dollar cash isn’t to be sneezed at.”

(Source: deVere Group)

Said markets present anticipated price developments daily, weekly, monthly and yearly, and when scouting for profits, bidding investors will act according to the market sentiment.

If the anticipated price development of a market’s stock is upwards, meaning the value of certain stock is rising or expected to rise, as a consequence of trends, single events, supply materials, current affairs or many other factors, the market sentiment is expressed as bullish. Vice versa, if the anticipated price development is on the downtrend, by any of the same reasons, the market sentiment is expressed as bearish.

It isn’t always as simple as this however. Market sentiment is also considered to be a contrarian indicator. For example, extremely bearish markets may subsequently display dramatic spikes – the turning point for this is often where the risky decision making appears.

Market sentiment, the overall expression of a certain market as bullish or bearish, is normally determined by a variety of technical and statistical methods that factor in the comparisons of advancing & declining stocks as well as new lows & new highs in the market. One of these is known as the Relative Strength Index (RSI); it relates the number of assets bought to assets sold, indicating whether capital is flowing in or out of the market in question. Normally, as a market follows sentiment either way, the flock follows, meaning the overall movement of the market’s stock follows the market sentiment directly. To quote a popular Wall Street phrase: “all boats float or sink with the tide.” The more investors buy, the more investors buy; it’s usually exponential development.

This of course could happen indefinitely, if it weren’t for the fact that as stock trading volumes rise, as does the price. Eventually the price hits a market high and the potential for profits is minimized. At this point the fall to a bearish market usually comes to fruition. On the other hand, as trading volumes fall, prices go down, to the point where eventually the price is so low it would be foolish not to buy, therefore turning the market on its head.

As obvious as it may seem, the words bullish and bearish reflect exactly what you would expect and are not simply paraphrases. An optimistic investor, happy to buy, buy, buy as the market sentiment is bullish, is considered a bull; aggressive, optimistic and almost reckless, striking upwards with its horns. Equally a bearish investor is considered a bear because he or she does not trade without utmost consideration, he or she is pessimistic towards trading expectations and believes prices will fall, or fall further than they already have. The bear therefore decides to sell, sell, sell, and pushes the prices down; as a bear that strikes its paws to the ground.

Make sure you check one of our top read features ‘The Top 10 Greatest Stock Market Trades Ever’.