Written by Troy

Based on current economic data, the Medium-Long Term Model predicts that this bull market still has 1-2 years left.

A reader asked

As a fellow 3x ETFer, are we not playing with fire with a correction being so close?

Here’s my detailed response.

The stock market can go up a lot in the final 2 years of a bull market.

Risk is higher in the last 1-2 years of a bull market. But it’s important to remember that the stock market can go up A LOT in the last 1-2 years.

1. Bull market ending on December 2, 1968: the S&P went up 15% in the last year and 35% in the last 2 years of this bull market.
2. Bull market ending on January 12, 1973: the S&P went up 15% in the last year and 28% in the last 2 years of this bull market.
3. Bull market ending on March 24, 2000: the S&P went up 19% in the last year and 38% in the last 2 years of this bull market.
4. Bull market ending on October 11, 2007: the S&P went up 14.8% in the last year and 30% in the last 2 years of this bull market.

Let’s be conservative. Let’s say that there’s only 1 year left in this bull market and not 2 years. Hence, the stock market can go up at least 15%. UPRO can go up 45% (UPRO is the S&P 500’s 3x leveraged ETF). A 45% gain in one year is nothing to sneeze at.

This bull market might last for more than 1-2 years

What happens if this bull market lasts more than 1-2 years? What if it’s 2-3 years? Or even 3-4 years? You cannot afford to miss out if the bull market lasts another 3-4 years. The longer this bull market lasts the more potential upside there is.

The Medium-Long Term Model states that the current bull market has 1-2 years left based on the trajectory of current economic data. The final SELL date will change as new data comes in.

Here’s the truth. Nobody has a crystal ball that can tell you EXACTLY when in the future XYZ will happen. Nobody can say “the bull market will end in December 2019”. The best we can do as forecasters is to take things one step at a time. We can only say with confidence “a bear market will not begin next month”.

Remember, always take things one step at a time.

Understanding your risk

Trading and investing without a stop loss is inappropriate. The Medium-Long Term Model does have a stop loss. This stop isn’t based on a predetermined price level (e.g. “sell when the market is down -10%”).

Instead, the stop is based on cases. If the market’s decline starts to exhibit bear market-like characteristics, then the Model recognizes that it failed to predict the bull market’s top. It clears out my entire long UPRO position. This is essentially a stop loss for the entire bull market.

Stick to your strategy

Every trader and investor must stick to his/her strategy. Jumping in and out of strategies is the worst thing that you can do. Discipline = long-term trading success.

So perhaps I’m wrong (I don’t think I’m wrong, but we’ll see). But even if I suffer a e.g. 30% loss in the last trade of this bull market, I am still up multiples throughout this bull market. I still beat buy and hold by more than 3x. That is my objective.

You need to have a benchmark when you trade. My benchmark is 3x to the S&P 500 in a bull market.

What you can do to mitigate risk

You can consider going 2/3 long UPRO instead of going 100% long UPRO if you’re not comfortable with the possibility of a bear market starting in 1-2 years. This is essentially being 2x long vs. the S&P 500.

Remember, bear markets don’t go down in a straight line. The first big bear market rally usually retraces 61.8% of the entire bear market.

Here’s the first big DOWN wave and 61.8% in the 2007 bear market.

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Here’s the stock market’s very flat top in 2000.

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Here’s the stock market’s 61.8% retracement in 1973

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Here’s the stock market’s >61.8% retracement in 1969

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These 61.8% retracements and flat tops give bullish investors/traders enough time to get out if they’re caught flat-footed by the bear market.