In the spirit of hope and optimism for the New Year, I’m going to depart a bit from my usual concerns (which are no less pressing at the moment), and instead discuss when to become bullish, why to become bullish, and how often to become bullish. Using the word “bullish” three times in a single sentence may be a record for me. Despite being a lonely raging bull for years coming out of the 1990 recession, and shifting positive in early 2003 after the 2000-2002 downturn, my defensiveness during the most recent cycle has lent far too much to my characterization as a “permabear.” Any previous bearishness I've had was validated by the 2000-2002 rout, and again by the 2007-2009 plunge, which wiped out the entire total return achieved by the S&P 500 - in excess of Treasury bill yields - all the way back to June 1995. While the S&P 500 - even with the recent advance - has underperformed Treasury bills for nearly 14 years, the stratospheric valuations of 2000 are well behind us. Valuations are still rich, but they are now in the range we've seen near more typical bull market highs, so I also expect a more typical frequency of bullish opportunities in the market cycles ahead. Looking over the full span of history, the return/risk estimates from our ensemble methods have been positive about 65% of the time, and would indeed have encouraged a leveraged position (unhedged, plus a few percent in call options) about 50% of the time.
Present conditions will change, and bullish opportunities will emerge, as they always have in other complete market cycles. Understandably, if one expects nothing but a defensive position at all times, even a moderate drawdown makes no sense to endure. But if one is pursuing a risk-managed strategy that seeks to take significant exposure over the course of the market cycle, and to significantly outperform the market over time, the drawdowns should be considered in the context of what the market itself typically experiences over the course of an ordinary cycle.