Merril Lynch’s David Rosenberg predicted the recession in January of 2008, when the downturn was in its infancy and the Dow Jones was only down about 10%. Rosenberg gave credit for his great insight to Merril Lynch’s former investment analyst Bob Farrell’s “10 Market Rules to Remember”.

Rules one through four, which include the belief that markets always return to long-run averages and excesses in one direction are invariably followed by excesses in the opposite direction, are applicable to this decade’s housing cycle, Rosenberg said.

Farrell’s rules “were a compass in terms of guiding me through the past three years,” said Rosenberg

– Bloomberg, “Merrill’s Rosenberg Inspired by Farrell in Foreseeing Crash” 

Farrell’s 10 Market Rules to Remember:

1. Markets tend to return to the mean over time.

2. Excesses in one direction will lead to an opposite excess in the other direction.

3. There are no new eras — excesses are never permanent.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.

5. The public buys the most at the top and the least at the bottom.

6. Fear and greed are stronger than long-term resolve.

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names.

8. Bear markets have three stages — sharp down — reflexive rebound —a drawn-out fundamental downtrend.

9. When all the experts and forecasts agree – something else is going to happen.

10. Bull markets are more fun than bear markets

For a detailed analysis of the ten rules, check out this MarketWatch article.

Even with the stock market finding a pulse of late, the overwhelming investment sentiment is clearly pessimistic. I can’t stop thinking about October of 2007 when the Dow Jones was at 14,000. The investment community and average investors were unified in their optimism to equal levels that they are now pessimistic. I love Farrel’s ninth rule – when all the “experts” agree, something else is going to happen. I’m still firm in my belief that Mr. Market has given value investors a great opportunity to buy.

Any thoughts on Farrell’s ten rules?

Posted by Max Asciutto

Hi I'm Max Asciutto! The Intelligent Investor blog is dedicated to blending Benjamin Graham's time-testing investment advice with a modern flair to write contemporary investment articles and stock reports to help you make better investment decisions. If you'd like to stay in touch, you can subscribe to my monthly newsletter or follow @aValueInvestor on Twitter.

Leave a reply

Your email address will not be published. Required fields are marked *