For those who wanted to follow along, this will be the third execution of my refined, structured Market-Based Buying Strategy for 2026 for investing well with minimal effort: https://brighterdayslifecoaching.com/a-structured-market-based-buying-strategy-for-investing-well-with-minimal-effort/.
This post is for all investors: High Risk (HR), Medium Risk (MR), and Low Risk (LR) investors. If you aren’t sure what your investment risk category is, you can find it here: https://brighterdayslifecoaching.com/investment-tools/
2. Take a look at overall market indicators for the S&P 500 index to determine whether or not it is approaching extreme highs indicating a coming potential, substantial decline.
These indicators might include one or more of the following:
a. Cyclically Adjusted Price-to-Earnings (CAPE) ratio: Current Stock Market Index Price divided by average inflation-adjusted 10-year Earnings Per Share for the same Market Index. Here’s one source that talks about this indicator: https://www.investopedia.com/terms/c/cape-ratio.asp. The CAPE ratio approaching historical highs can be indicative of a potential, stock market decline although it has had a poor track record of timing the market overall. In recent months, the CAPE for the S&P 500 index has been approaching its highs historically speaking (e.g., as of this writing I believe a CAPE of 22 or higher might be a good number to use as an initial indicator for paying close attention and perhaps becoming more cautious overall).
b. Buffet Indicator: Present Total U.S. Stock Market Value divided by Gross Domestic Product (GDP). Typically, the Wilshire 5000 index is frequently used to represent the Total US Stock Market Value. Here’s one source that talks about this indicator: https://currentmarketvaluation.com/models/buffett-indicator.php. The Buffet Indicator approaching historical highs can be indicative of a potential, stock market decline although it has had a poor track record of timing the market overall. In recent months, the Buffet Indicator has been approaching its highs historically speaking (e.g., as of this writing I believe a Buffet Indicator approaching two standard deviations above the long-term trend line – roughly 185 or higher as of this writing – might be a good number to use as an initial indicator for paying close attention and perhaps becoming more cautious overall). Warren Buffet offered a simple guide: “If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200% — as it did in 1999 and a part of 2000 — you are playing with fire.”
c. Average Length of Bull Market: According to Bespoke, since 1929 the average bull market has lasted 1011 days: https://media.bespokepremium.com/uploads/2024/07/Bespoke-Report-071224-Pros-Cons-78hy76.pdf. Bull markets in later stages (approaching or above the average) are likely to decline at some point although the timing can be questionable. The present bull market is still in its early stages and is far short of the average length.
d. Average % Gain of Bull Market: According to Bespoke, since 1929 the average bull market has gained 114%: https://media.bespokepremium.com/uploads/2024/07/Bespoke-Report-071224-Pros-Cons-78hy76.pdf. Bull markets approaching or above the average % gain, are likely to decline at some point although the timing can be questionable. The present bull market is far short of reaching this average gain.
e. Volatility index (VIX) approaching lows on a historical basis. Frequently the VIX at low levels rises sharply at some point and the S&P 500 index falls substantially. In recent months, the VIX has oscillated between lows and highs – but has not been at extreme levels.
f. Technical Indicators for S&P 500 approaching highs – especially when looking at weekly charts over several years (e.g., MFI approaching or above 80, RSI approaching or above 70, S&P 500 approaching or above upper Bollinger Band, MACD at extreme levels, etc.). Technical Indicators approaching highs can signal a coming potential, substantial stock market decline. In recent months, the above technical indicators for the S&P 500 have approached its highs historically speaking.
g. Technical Indicators for VIX approaching lows – especially when looking at weekly charts over several years (e.g., MFI approaching or below 20, RSI approaching or below 30, VIX approaching or below lower Bollinger Band, MACD at extreme levels, etc.). Technical Indicators for the VIX approaching lows can signal a coming potential, substantial stock market decline. In recent months, the aforementioned technical indicators for the VIX have not been at or approaching extreme levels – low or high historically speaking.
h. Gains substantially above long-term stock market average. The S&P 500 index gains about 10% annually (on average including dividends) – so if you experience substantial gains above and beyond that then it might make sense to sell at least part of the gains. This is particularly true for lower-risk investors – higher-risk investors probably would not be as concerned with this. As a low-risk investor, I frequently sell good gains as I experience them. However, above average gains can continue from one year to the next – and frequently they do – so the timing can be questionable. In the past two years, the S&P 500 Index has far exceeded the average (24% gain in 2023 and 23% gain in 2024). At some point, annual gains are likely to revert back to the long-term average.
i. See how the EIRY calculated in step 1 for the S&P 500 index compares to the 10-year treasury bond rate (TNX). Anytime the TNX approaches or exceeds the EIRY for the S&P 500 index, this indicates investing in the “risk-free” TNX is the more compelling investment and can signal a potential substantial decline in the S&P 500 index at some point although the timing can be questionable. For example, on 24 January 2025, the EIRY of the S&P 500 was 4.78% while the TNX was 4.63% – indicating the S&P 500 would only be a slightly better investment than the TNX meaning it is probably not worth the risk. If the EIRY for the S&P 500 was 50%+ higher than the “risk-free” TNX, then it would be a much more compelling investment and more worth the risk. 19 JUNE 2025 UPDATE: I will probably not be putting as much weight on how the EIRY compares to the TNX for some time because of the bond market losing its “low-risk safe haven” status due to the presence of the multiple risks discussed here: https://brighterdayslifecoaching.com/storm-clouds-on-the-horizon-the-bond-markets-and-the-low-risk-safe-haven-facade-part-2-2025/.
j. GDP approaching certain thresholds. As indicated in this post https://www.aol.com/finance/heres-where-wall-street-sees-211510635.html, the overall stock market generally experiences substantial gains when GDP is either negative or at 2.1%+, while substantial losses tend to be experienced when GDP is between 0% and 1% (losses are also generally experienced when GDP is between 1.1% and 2% – but the losses are much smaller). Keep in mind when considering this that the stock market tends to be “forward-looking” in nature and typically reflects what investors believe will happen in the next 6+ months.
k. Average Number of Years Between Recessions and Average Stock Market Declines During Recessions: According to Kiplinger, since the end of World War II, the U.S. has suffered 12 recessions – or an average of one every 6.5 years (https://www.kiplinger.com/slideshow/investing/t038-s001-recessions-10-facts-you-must-know/index.html). This means we can reasonably expect a recession every 6.5 years or so and the average stock market decline for a recession is about 30% according to Kathmere Capital Management(https://www.kathmere.com/wp-content/uploads/2022/06/August-2022-Recessions-and-the-Stock-Market.pdf#:~:text=The%20table%20shows%20that%20on%20average%20the,prior%20to%20the%20start%20of%20a%20recession). So, if there hasn’t been a recession in many years, it might be a good time to become a bit cautious and starting to prepare for one.
Now, although each of the above indicators has limitations, they can signal whether the overall stock market might be approaching extreme highs indicating a coming potential, substantial decline – especially when these highs are signaled by several indicators. Many indicators, however, are not very precise, and tend to reflect highs much more frequently than lows over time. The overall stock market tends to go up over the longer-term because demand outpaces supply for much of the time, causing share price increases (you can read more about this here: https://brighterdayslifecoaching.com/why-the-overall-stock-market-goes-up-over-the-longer-term/). Due to this tendency, the overall stock market naturally becomes more expensive over time – so it can be difficult to determine the point at which it becomes so expensive that substantial declines occur.
The above are just a few of the technical and overall market indicators you can use. There are several others available including those discussed here: https://finance.yahoo.com/news/why-more-wall-street-firms-230100571.html
Usually I wait until the S&P 500 index falls about 10% before doing the 3rd execution (as of today this index has dropped nearly 9% from its all-time high) – however, two of the eight major stock market indexes I track have dropped beyond 10%, and one other is right at the 10% drop. So, you can wait for a drop in the S&P 500 index or start buying if the major stock market indexes remain at their current levels or drop a little more. It’s up to you. We’ve already received a pretty good discount to date so for those who are ready to potentially start executing this strategy:
HR Investors might consider buying such that another 33.3% or more (depending on investment style and preference) of their overall investment account is invested into one of the major market index Exchange Traded Funds(ETFs) (or you can split that across multiple major market indexes if you prefer) – If you did not invest the last time when I sent out the 1st and 2nd Execution notifications then the total would be 100% (33.3% for the 1st execution plus 33.3% for this 2nd execution plus 33.3% for this 3rd execution).
MR Investors might consider buying such that another 15% or more (depending on investment style and preference) of their overall investment account is invested into one of the major market index Exchange Traded Funds (ETFs) (or you can split that across multiple major market indexes if you prefer) – If you did not invest the last time when I sent out the 2nd Execution notification then the total would be 30% (15% for the 2nd execution plus 15% for this 3rd execution).
LR Investors might consider buying such that 5% or more (depending on investment style and preference) of their overall investment account is invested into one of the major market index Exchange Traded Funds (ETFs) (or you can split that across multiple major market indexes if you prefer).
The longer and the deeper the drop you wait for, the greater the likelihood you will miss the rebound. So, some of you might want to prepare to go ahead and buy. It’s your financial future so do what you think is best for you.
I currently track eight major market index ETFs: S&P 500 index (e.g., SPY ETF), an equal-weighted version of the S&P 500 Index (e.g., RSP ETF), the Total Stock Market index (e.g., VTI ETF), the Vanguard Value Index Fund ETF Shares (VTV – value stocks of large companies), the Nasdaq (e.g., QQQ ETF), a Mid-Cap Stock Index ETF (e.g., IJH ETF), Russell 2000 index (e.g., IWM ETF), and the EFA ETF (or something similar). The first seven are major U.S. based indexes, while the last one tracks international stocks of developed countries outside the U.S. and Canada.
Of the above major market index ETFs, the EFA ETF international index fund (or IEFA which is the one I like since the fees are lower) is the most attractive one right now by far. However, if you prefer U.S. based indexes the most attractive of those right now appear to be: IWM and QQQ based on my analysis. So, you can pick one or more of these ETFs or split your investment across these if that is your preference. None of these indexes/ETFs are without risk, however.
For example, the EFA (or IEFA which is the one I like since the fees are lower) can be impacted by U.S. trade policy and has potential currency exchange risk as well since this index is not U.S. based – it is also the one most affected by oil prices as they rise; especially if they remain high. In terms of the potential currency exchange risk, a falling dollar tends to increase gains while a rising dollar tends to reduce gains. However, the currency exchange impact is not typically very substantial unless the dollar experiences big moves when it comes to the EFA ETF. So, if you are very concerned about these kinds of issues, then you might want to choose a different index to buy into or split your investment across different indexes.
In a slowing economy, the IWM (or SPSM which is the one I like since it only includes the profitable small businesses contained in the Russell 2000 index) tends to outperform in lower inflation economic environments, lower interest rate economic environments, and when the economy is performing well overall. This index also tends to drop the fastest and deepest in a slowing economy but rebounds sharply in the midst of the economic slowdown in anticipation of economic recovery.
The QQQ ETF suffers from higher valuation and concentration risks where a select few large cap stocks tend to dominate – some investors/economists are greatly concerned about the valuation and concentration risks while others believe they are appropriate since that is where much of the earnings growth presently is. You can read about the risks associated with the major stock market indexes here: https://brighterdayslifecoaching.com/investment-tools/ (just scroll down to “UNIQUE DIFFERENCES IN STOCK MARKET INDEXES“).
Feel free to start buying in one or more of the aforementioned major market index ETFs if the major market indexes remain close to where they closed today or drop a little more below that level. You can use the specific major market indexes above or use a different one that suits you. Just ensure the fees are at least as low as the ones identified above when buying. Some people like to split their investments across multiple indexes to help manage the risk so feel free to do the same.
Another reason to potentially buy into the stock market in the near term is the Volatility Index (VIX) closed above 31 today which is higher than normal. In addition, the near-term technical indicators are reflecting extreme levels for the VIX. These indicate a sharp reversal could happen over the near term for the VIX – and when the VIX drops, the overall stock markets tend to rise.
Keep in mind you don’t have to be very precise when buying into the overall stock market – a gain is experienced 93% of the time over rolling 5-year periods and 100% of the time over rolling 10-year periods no matter when you buy. In sharp contrast, being a seller or waiting for drops to happen can be challenging in that you will be “wrong” 93% of the time over rolling 5-year periods and 100% of the time over rolling 10-year periods. So, you have to be very precise as a seller which is one reason higher risk investors should probably never (or rarely) sell. You can read more about this here: https://brighterdayslifecoaching.com/investment-tools/ (just scroll down to item 1 under “KEY HISTORICAL STOCK MARKET TRENDS”).
Here are a few historical trends which might be helpful to keep in mind: A 3-5% drop in the S&P 500 index generally happens about three times a year, a 10% drop generally happens about once every 1.5 years, and a 20%+ drop generally happens about twice every five years. So, the deeper the drop you wait for before buying, the higher the likelihood you’ll miss a significant rebound. You can read more about this here: https://brighterdayslifecoaching.com/investment-tools/ (just scroll down to item 2 under “KEY HISTORICAL STOCK MARKET TRENDS”).
You can learn about all of my investing techniques via my “Invest Like a Pro in 10 Minutes a Day!” series of 4 books where you can learn the “end to end” process to investing: https://brighterdayslifecoaching.com/published-books-and-life-coaching-services/.
Also, you can follow all of my stock market activities here: https://brighterdayslifecoaching.com/stock-market-activities
I wish you much investing success for 2026 (and beyond!).
selfimprovement #selfhelp #selfdevelopment #success #finance #stocks #investing #stockmarket #bonds #bondmarket