The bull market that we’re enjoying today is still relatively young, historically speaking, at just 27 months old (having begun in October 2022).
But it’s also been uniquely narrow, leading to concentration in just a handful of market leaders.
And, although bull markets don’t just up and die from old age, they do end eventually, so it’s useful to take steps to moderate expectations for continuing explosive growth while also guarding against downside risk.
One popular way to measure the sustainability of a bull market is to look for contrarian indicators that signal the market has become overbought.
In essence, it’s an attempt to gauge the level of “FOMO” (Fear Of Missing Out) from investors. When investors are complacent and throwing caution to the wind, there’s increased risk of a selloff or correction.
Conversely, when you’re looking for signs of a potential reversal in a correction or bear market, you’d want to look for signs that the market is oversold and that market sentiment is at its weakest.
The Investors Intelligence Bull/Bear Ratio is a popular way to do just that. A reading above 4 typically signals that the market is exuberant and at risk of selling off, while a reading below 1 signals that sentiment is too bearish and is poised for a rebound.
You can see the current Bull/Bear Ratio in the chart below:
Source: Yardeni Research
We’ve just come off a period of bullishness (near 4), and we were above that level twice in 2024. All three elevated readings were followed by brief corrections.
But … the bull market resumed after each of the two peaks last year, and appears well on its way to doing so again.
In fact, the Bull/Bear Ratio quickly flipped from “too bullish” to “too bearish” in just a few short weeks to start the year.
For a short-term trader, the elevated reading would have been a viable sell signal, assuming that trader went long again shortly thereafter.
For longer-term investors, disregarding that Bull/Bear ratio would have been a better move than acting on it.
So, if we can’t rely on sentiment measures (at least in the current bull market) to give us reliable reversal signals, what can we do?
Another popular option is market breadth, metrics that measure how much of the market is participating in the bull run.
Metrics like the NYSE Advance-Decline line, the number of stocks trading below moving averages, and the performance of other indexes, like the S&P 500 Equal-Weight Index, are all ways to take the market’s temperature.
December saw some weakness on that front, with 80% of stocks in the NYSE and S&P 500 at or below their 50-day moving averages and the Equal Weight index falling 6.6% for the month.
But this bull market presents risks to reading too much into those metrics too, as so much of the last two years’ performance has been driven by only a handful of stocks.
With the finicky nature of the bull market, I want to highlight three areas you can watch to get a gauge of exactly how risk-on the market is.
These are, essentially, the most speculative areas of the market. If they’re thriving, risk-taking is alive and well; if they start to pull back meaningfully, it may be a signal that the market’s appetite for risk is waning.
3 Bull Market Sectors That Will Turn Tail First
Bitcoin & Cryptocurrencies
Bitcoin, which rose 131% in 2024, is a perfect encapsulation of speculative risk. It lives in bull markets and dies in bear markets, and that pattern has been a higher-quality predictor of the asset’s performance than any other.
And right now, bitcoin is signaling that the market’s appetite for risk is still going strong. The cryptocurrency just reclaimed the $100,000 level (at $104,000 as I write this) and appears well on its way to retesting prior highs.
Commercial Space Stocks
AST SpaceMobile (ASTS) and Rocket Lab (RKLB) were two of the best-performing stocks of 2024, and both companies are losing money (AST made only $1.4 million in revenues in the trailing 12 months, Rocket Lab made $364 million; neither company generated any income).
While growth stocks, in general, outperform when the appetite for risk is high, investor interest in novel technologies is a good measure of the level of optimism in the market.
Quantum Computing Stocks
Quantum computing stocks have recently come into vogue, and the case for tracking them closely aligns with commercial space:
-Huge levels of investor enthusiasm.
-New technology that is not yet monetized (or possibly monetizable).
-Price performance is driven by what could be.
The Gartner Hype Cycle would place both of the latter two groups on the path toward the “Peak of Inflated Expectations.”
Because investor sentiment is somewhat ethereal, it’s a risk to place too much emphasis on an easily monitored number (like the Bull/Bear ratio), but watching where the most speculative investors are pushing the most money (like the high-flying sectors above) can give you a sense of how much froth may be in the market.
When the most speculative investments start pulling back, it’s an indication that investors are becoming more risk-averse and may be looking to take profit elsewhere.
