February 24, 2025
As the market remains frothy from a historical perspective, I encourage you to read some interesting points from Merrill Lynch’s former Chief Market Analyst, Bob Farrell.
His famous “Market Rules to Remember” first appeared after the dot-com bubble burst. But they remain relevant today, especially considering the market’s similarities.
These are Farrell’s rules:
- Markets tend to return to the mean over time.
- Excesses in one direction will lead to an excess move in the opposite direction.
- There are no new eras – excesses are never permanent.
- Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.
- The public buys the most at the top and the least at the bottom.
- Fear and greed are stronger than long-term resolve.
- Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names.
- Bear markets have three stages – sharp down, reflexive rebound, and drawn-out fundamental downtrend.
- When all the experts and forecasts agree – something else is going to happen.
- Bull markets are more fun than bear markets.
If you’ve got some investing experience, you can probably draw parallels between the above list and what’s happening today.
The possibility of a sideways market – long stretches when the market goes nowhere – is high, in my opinion. That’s relevant for rule four above. If sideways trading occurs, it will be after any big bear markets or corrections.
And it could last for decades – it’s happened with U.S. and Japanese markets in the past.
Lastly, don’t underestimate rule six. Fear and greed are powerful forces. Don’t let them infect progress towards your long-term goals.