Let’s begin with a reminder of where we are in the market cycle. At present, the stock market is in a mature, heavily bullish, overbought, overvalued bull market advance, near a multi-year high in the S&P 500, with consumer confidence at similar multi-year highs, with the broad perception that downside risk is insignificant, and that “tail risk” has been eliminated. This is a dangerous place to be, because it is precisely where risk aversion is scarce and hated most by investors, and where risk aversion is most likely to be rewarded in the future.

Consider the opposite. Recall the points in time where the stock market has been in a mature, heavily bearish, oversold, undervalued (or at least moderately valued) bear market decline, near a multi-year low in the S&P 500, with consumer confidence at similar multi-year lows, with the broad perception that downside risk is enormous, and that “tail risk” is growing. This is a wonderful place to be, because it is precisely where the willingness to accept risk is scarce and hated most by investors, and where the willingness to accept risk is most likely to be rewarded in the future.

Which market environment is the one where investors should generally be optimistic about multi-year market prospects? Clearly, the second. It’s a description that applies well to the 1974, 1982, 2002 and 2009 bear market lows. In contrast, the present description applies equally well to the 1972, 1987, 2000 and 2007 bull market peaks. It should be utterly obvious here that risk aversion is appropriate in present conditions.

…..read more about 2009 versus 2013 HERE