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How will we know when the bull market is coming to an end?

This is a timely question, given the extraordinary crosscurrents buffeting the market. Some advisers contend that the bull is alive and well, while others assert that the bull is living on borrowed time.

For insight, I turned to Ned Davis Research, the quantitative research firm, which monitors a basket of indicators to help determine when a market top is imminent.

Nearly two years ago I turned to the company for help in answering this very question. At the time, many were convinced the rally was but a bear-market correction. But Ned Davis, upon analyzing various indicators of a potential top, concluded that the bull market had further to go.

What does Davis' firm say now?

Ed Clissold, the global equity strategist at the company, said there are worrisome signs on the horizon, but the company is giving the bull the benefit of the doubt.

In assessing when the bull might end, Clissold said, the company has identified four major categories:


Though stock valuations aren't at such an extreme as to cause this category of indicators to flash a sell signal, there are causes for concern, Clissold said.

One of these, according to a letter Ned Davis sent last week to institutional clients, is that "profit margins on the S&P are at record highs. . . . Using data back to 1954, very high profit margins, on average, have not been bullish for stocks, because the series is very mean-reverting."

Davis also was concerned with the cyclically adjusted P/E ratio made famous by Yale professor Robert Shiller.

At the same time, however, Clissold referred to other valuation measures that suggest stocks are not particularly expensive, such as the P/E ratio based on 12-month earnings (as opposed to the 10-year average Shiller prefers).

All in all, a split decision on valuation. As Davis wrote earlier this week: "I can certainly understand the bullish stance of those who argue stocks are still reasonably priced, based upon current earnings. Yet, I don't think that presents a complete picture of potential risks. I am just providing the evidence for clients to make their own decisions."


This is the one category of the four that, in Davis' opinion, comes closest to yelling "sell."

Davis maintains two sentiment indices, one of which is well into the zone of excessive optimism; the other borders on that zone.

On contrarian grounds, that is worrisome.