So, if we accept this contention that the stock market has ceased to represent and is ignoring economic reality, then common sense tells us that economic facts and analysis can not now give us very much in the way of information about how stocks are going to perform. The market now "stands alone", having become a self-referenced system, feeding on itself, and its performance to date--not external factors--is at present the best (indeed the only) predictor of future performance. That is why the increase in prices in these situations tends to become exponential: it is just mathematics, not economics. The more prices go up, the more money will be drawn in, and the more prices rise. (As an aside, it may be worth mentioning here that this is the reason for the oft observed fact that in bull markets, bad news is ignored--the process is not really being driven by economic news, except that good news reinforces the real underlying driving forces.)

And, because of this, there is no telling how far the market will rise or how long this bull will continue. There is an ultimate mathematical limit to it, the drying up of available new demand, but the pool that can be drawn upon (cash assets within the USA, such as bonds, and the ongoing flow of overseas funds into the American economy) is so huge that that the limit is a long way off indeed. Dow 12,000+ would likely be easily reached if the pool of new demand were the only limiting factor, and it is indeed considerations as this which are leading some analysts to predict that most stocks will continue to soar. And they may. But a sell-off may happen at any time. I will look at this below, but first want to consider what this analysis, if correct, means for equity investors.

Point 1: For most stock market investors, it is already too late.
If a lot of investors attempt to sell, the market crashes. That is all there is too it now. Some number of investors can take the courageous decision to sell out now, risking forgoing further profit, but holding their gains. Others might protect themselves by the use of derivatives,perhaps placing a down bet on a market index such as the S and P. The rest are in big trouble.

Point 2: Buying now for the long-term is foolish.
Given the risk of a crash, buy-and-hold is now the worst strategy an investor can follow. He is knowingly purchasing assets at very inflated prices. He is not only hoping that they will become even more inflated, but that they will stay that way.

Point 3: There are still opportunities for the skilled short-term and medium-term investor.
I have heard people say that a market like this one must eventually collapse "under its own weight", but this is merely rhetoric. It is not a meaningful statement, and has the unfortunate consequence of leaving an impression that the higher the market goes, the more probable it is to collapse in the near future. This is probably not true. Think of it like tossing a coin and getting seven heads in a row. Intuitively it is easy to feel that the likelihood of getting another head on the eighth toss is very low, but of course it is still exactly 50%. I consider that the probability of a crash in 1997 is no greater than it was in 1996. And, if we survive 1997, it will be no greater in 1998. But this does not mean go for a buy-and-hold strategy: that is rather like doubling up your bet on every toss --you must lose eventually. It does however imply that, provided you understand the risks involved, have a strategy appropriate to the times and a firm exit strategy, there may still be no more risk involved in short- and medium-term investing than there ever is. How does the probability that the market will rise as oppose to fall over the next month (two months, three months, ... ) look? It is more likely to go up than fall, but it is the size of the downside risk that is the problem; in my opinion this outweighs the probable gains of a medium-term investment in, say, no-load equity mutual funds. But, for those with the market savvy, there are strategies that can be used to make money if the market continues up, whilst limiting the downside risk. Going long through the purchase of call options (whilst keeping ones capital safe, and liquid) may be one of the best strategies, but it is only for those who understand options trading. Overall though, those in the best position to make money in this market probably are the short-term traders.

Point 4: Forget about sector rotating. This bull market now has little to do with the economic cycle. Business sectors in and out of favour are today a result of investors chasing momentum. And a market crash is going to take all sectors with it (precious metals mining stocks may just possibly be an exception).

That is, there will be a failure of market sentiment. There are a myriad of possible things that could trigger this. It may be something big and obvious--a war that breaks out in the mid-east, a major financial or political scandal that erupts in America, a revelation that the Japanese have started selling off part of their huge holdings of US Treasury Bills. But more likely it will be something that on the surface looks trivial, or even no single trigger may be apparent: it may be simply an accumulation of tiny doubts adding up to a sudden panic. There is an analogy in the way a defeated army sometimes collapses, seemingly all at once, without any single event: military men will understand such a collapse of morale.

And, there will almost certainly be no warning. The technical analysts will probably not see it on their charts before it is upon them. If the trigger this time is some external event, then some fundamental analyst may have seen this event coming but there are so many scenarios out there, who knows which if any will be right until after it happens? And if it is just a failure of sentiment, then seeking a prime cause, even post hoc, will be a futile exercise.