Additional Insight from Jim Stack

We recently spoke with Jim Stack, president of InvesTech Research and editor of the newsletters InvesTech Research Market Analyst and InvesTech Portfolio Strategy. Stack has built a reputation as a top prognosticator. Seemingly clairvoyant at times, Stack called the beginning of the bear market in 2007 and the bottom in March 2009. In years of extreme market stress, such as in 2008, 2002 and 1987, Stack has shown an ability to protect his clients from disaster.

KIPLINGER'S: What signals might indicate that the bull market may be coming to an end?

STACK: Look for divergences in indexes that tend to lead the broader market. At market tops, those often include the Dow transportation average, which is economically sensitive, and the Dow Jones utility average, which is interest-rate-sensitive. Also look at the Russell 2000 index. If the Russell 2000 starts falling faster than the Dow industrials and the S&P 500, or if it fails to confirm a new high in those blue-chip indexes, then you’ve got good reason to move to a more defensive stance.

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The dollar can also be a warning sign. If the dollar falls below its 2008 lows it’s not necessarily time to sell your stocks, but a weaker dollar is not a positive for the bull market’s longevity. Also keep an eye on the 30-year Treasury bond. If its yield climbs above 5%, it will be time to take profits in stocks and move to a more defensive stance.

What’s your sense of the stock market’s current valuation? Based on earnings for the S&P 500 over the last four quarters, the market’s price-earnings ratio is close to the long-term historical average of 17. So from a historical viewpoint, the market is close to fairly valued. But valuations in the market tend to move inversely to the yield you can get on cash-type investments. High interest rates tend to drive valuations lower. Low interest rates, which we have today, tend to push valuations higher. It’s not hard to find a lot of attractive companies if you compare the average dividend yield on many stocks, which is between 2% and 3%, with a money market fund, which yields almost nothing.

To return to the rest of the interview, see STOCK WATCH: Sell in May and Go Away?.

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