Editor's note: Nobody can predict the market top...

Stocks recently dropped into correction territory for the first time since March 2020 – and investors are starting to panic. Some are even wondering if the bull market is officially over. But Extreme Value editor Dan Ferris says they're wasting their time...

According to Dan, you won't know that stocks have topped out until long after it happens. That's why it's far better to prepare your portfolio for a wide range of possibilities...

In today's Masters Series, updated from the October 1, 2021 Digest, Dan details a "bubbly" story from the art world... the skill you need to survive a bear market... and the steps you should take to protect your wealth today...

If You're Not an Emotionless Cyborg, You Must Read This Essay

By Dan Ferris, editor, Extreme Value

Over the past few months, I have proclaimed that "this is a bubble"...

In the September 17 Digest, I gave my reasons for that proclamation... And then, later that month, I showed you how at least one bubbly corner of the market – special purpose acquisition companies ("SPACs") – already washed out so much that it's now a value play.

Naturally, as soon as I say it's a bubble, a crazy story appears in the industry prone to the weirdest financial excesses, suggesting the current bubble is as frenzied as ever...

And another corner of the stock market (which I've mentioned previously) now suggests that stocks may have already begun to top out.

Before we move on, just to be clear... I did not just call the top of the bull market.

By now, regular readers know that I don't do predictions... and I certainly don't call tops and bottoms.

My goal today is not to call the top. Instead, I simply want to give you a sneak peek of what it feels like at the top. (Hint: It feels just like this.)

But before we do that, I can't resist a good story from the art world... There's just no place for sheer, unbridled financial excess like the one for fine art. (OK, "fine" is debatable, but you know what I mean.)

In past Digests, I've covered such extravagances as a $120,000 banana taped to a wall... a $69 million non-fungible token ("NFT")... and an $18,000 piece of "invisible art" in Italy.

I thought I had seen it all (yet again) until the latest example came across my desk.

In short, several months ago, the Kunsten Museum of Modern Art in Aalborg, Denmark, contracted Danish artist Jens Haaning to recreate a pair of his previous works...

According to multiple reports, Haaning first exhibited the two pieces, "An Average Austrian Annual Income" and "An Average Danish Annual Income" in 2007 and 2010, respectively. The pieces were created as visual representations of the two countries' average incomes at the time of each work – 25,000 euros (roughly $29,000) and 328,000 Danish kroner ($37,800).

In addition to the undisclosed amount that the museum agreed to pay Haaning, it gave him $84,000 in cash to use as part of the two pieces of art. Haaning signed a contract that said the cash was to be displayed on the works... It wasn't his money to keep, and it had to be paid back when the exhibition closed on January 16, 2022.

However, as you can probably guess since I'm telling you about it, Haaning had other plans...

Instead of the two works requested by the museum, he submitted something much more interesting – two blank canvases under a brand-new title, "Take the Money and Run."

Haaning is apparently known for art that promotes activism with a sense of humor.

The humor part is obvious... Even museum director Lasse Andersson laughed when the newly delivered crates containing the works were opened, revealing the blank canvases.

But what's the activism angle, you ask?

How much artists get paid.

No joke.

According to a press release from Haaning, by changing the title and submitting blank canvases...

[He questions] artists' rights and their working conditions in order to establish more equitable norms within the art industry.

On a Danish radio show, Haaning also said...

I encourage other people who have just as miserable working conditions as I do to do the same.

Rights... more equitable norms... miserable working conditions... for gluing cash to canvases. Or this time around, for doing nothing!

But, well, maybe he's right...

Demanding that artists submit work you can actually see seems like nothing short of slavery... I bet some evil capitalist thought it up, just to keep artists enslaved.

Imagine being an artist who works for a global company like Disney (DIS)... or maybe some big advertising agency in charge of marketing. They must crank out a constant flow of real artwork that you can see. And I bet some of those folks don't even make $100,000 per year!

But they should darn well also have the right to submit nothing and get paid for it... or at least, the right to throw a banana against the wall and collect an extra $120,000 for it. They should all show up for work tomorrow... submit something invisible... and demand a big, fat raise.

Artists of the world, unite! Stick it to the man! Empty all of the world's art galleries of visible artwork! End the chauvinism of visible art now!

Thank heaven for frontline warriors like Haaning... He's striking at the root of this horrendous abuse on behalf of oppressed artists all over the world, the voiceless folks who are required to do actual artwork by heartless capitalist pigs.

The whole situation makes me want to vomit. I hope you sensed my sarcasm. I could keep going on this rant all weekend, though...

An artist saying he's underpaid to produce absolutely nothing is even crazier than the $120,000 banana and the $69 million NFT. It also trumps the previous work of invisible art in Italy, because that guy only got $18,000... which, by the way, he was paid outright without stealing it. He failed to get into the activist spirit like Haaning.

As Haaning said in a Danish radio interview, "the breach [of contract by taking the money] is part of the work." Not keeping your word is art these days, apparently.

The Danish museum has since issued a civil lawsuit to get the money back – although Andersson, the museum director, did admit that the exhibit was more popular than he expected.

I'm betting on Haaning, though... If he's smart, he has already converted the money to bitcoin and laughed all the way to Thailand.

Like the art world, the financial world is full of intangibles that can garner outrageous valuations...

But in a bubble, even the most valuable assets wind up being inflated well beyond their real value. And that means they also have a date with a bear market destiny...

That's what happens as reality catches up with these assets and sends the stock prices of the companies that own them plummeting back to Earth. True believers tend to hold on to the worst of these stocks for far too long. And of course, they get badly burned in the end.

The burning may have already begun...

Last year, I wrote about Cathie Wood and her company, ARK Investment Management. Specifically, I pointed to ARK's exchange-traded funds ("ETFs") as a sign of the bubble we're living in today.

ARK is focused solely on the theme of innovation... And plenty of the companies in its ETFs are unproven businesses with no profits. They're long on vision and short on cash.

These ETFs all surged triple-digit percentages off the March 2020 bottom. So in that way, investors were well-paid for what wasn't there – just like Haaning and the other creators of invisible art.

But lately, it appears the speculative froth is draining from these ETFs...

As you can see, the ARK ETFs all peaked during the "meme stock" madness in the first two months of last year. Now, they're almost all down between 30% and 60% from those peaks.

Even the ARK Space Exploration & Innovation Fund (ARKX) is down more than 15% since its debut last March. And that's despite the recent euphoria for space stocks.

All the ARK ETFs have followed a similar trajectory up and down. That's a typical bubble-like characteristic... When bubbles crash, all the price movements of the assets swept up in them tend to correlate, even if they were viewed as non-correlated assets before the crash.

For example, if you thought your shares in the ARK Israel Innovative Technology Fund (IZRL) would perform well even if your shares in the ARK Innovation Fund (ARKK) performed poorly, you've experienced a rude wake-up call over the past year.

Of course, it could be just an extended "risk off" moment in the markets, but who knows?

Again, I'm not calling the top in ARK's funds... I'm just showing what the top of a bubble looks like.

I could do the same exercise with the four big market indexes, though they don't look nearly as bad (yet?)...

The S&P 500 Index hit its most recent high on January 3. It's currently down 6.1% after falling as much as 9.8% below the peak. The Dow Jones Industrial Average peaked a day later, on January 4. Since then, the index is down about 4%.

The Nasdaq Composite Index reached its latest all-time high a little bit earlier – on November 19. It's down around 12% since then.

And the Russell 2000 Index of small-cap stocks topped out back on November 8. It's currently down more than 16% from that high.

With the latest tops in the S&P 500 and the Dow happening less than two months ago, and the Nasdaq's and the Russell 2000's latest tops occurring about three months ago... it's neither likely nor unlikely that the bull market has peaked.

You can't know that until the top is long in the past.

The point here is not to call the top – which, again, you know I don't do... The point is simply to show you ahead of time how the top will look and feel while it's starting to happen.

I want to do everything I can to guide you through the bear market when it finally arrives.

Everybody else will talk about it long after the top is already in. Even worse, every talking head on TV will smugly act like they knew it all along... even though they never said a word about it until the trend was well-established (like always).

But if you're not talking about what to expect at the top before it's definitely in, save it.

The skill you need is not calling tops... That can't be done. Rather, you need to recognize, understand, and control risk – and to learn the intuitive feel of a bear market.

But since you're a human and not a cyborg (more on that in a minute), it's better to talk about what it feels like instead of pretending there's some perfect suite of metrics that will predict it. (There isn't one.)

You'll know the top isn't in yet if the Dow, S&P 500, Nasdaq, and Russell 2000 all make new all-time highs again soon... And you won't know it until that happens.

With the recent pullback, the market-topping process could be underway right now... And the next bear market may have already begun. But there's no concrete way to know yet.

One more thing... I'd be doing you wrong if I didn't also point out that new highs are more likely than a bear market. Over the long term, markets go up and to the right.

Before I move on, I must share one caveat... Volatility is not risk – in the stock market or anywhere else.

In fact, a certain amount of volatility is healthy. Over a decade or more, you'll get plenty of random variations of different sizes (up and down) from day to day and week to week.

The fewer and smaller those variations, the more prone the market is to a larger correction, as we saw recently. But as long as plenty of small variations are occurring, big variations – like market crashes – will remain relatively rare events.

Now, with that caveat out of the way...

You can't predict the top (or even recognize it until it's long in the past) – but you can prepare for it.

I often say that the best advice is to prepare for a wide range of potential market outcomes. And you can do that by holding a truly diversified portfolio with four basic components...

• Stocks and bonds

• Plenty of cash

• Gold and silver

• A little bitcoin (or not, depending on your personal preference)

But today, I must confess... That's not nearly the whole story.

You see, most humans are their own worst enemies in a bear market. If the stock market falls 50%, 60%, or more over the next few years (as I believe is likely), far too many folks will make the absolute worst decision they could make... They'll sell at the bottom in utter despair, exhausted by the pain of watching their net worth fall by half or more.

That doesn't need to be you. You can handle this emotional battle in one of two ways...

First, you could be a totally passive investor. You could contribute to a 401(k) account and not actively buy and sell stocks weekly – or even monthly. If you forget about your portfolio for 30 to 40 years, you'll probably be fine.

But if you're reading my words right now, that likely isn't an option...

Odds are that you're actively managing your own portfolio, buying and selling stocks based on a specific strategy. You either make money or lose money based on numerous decisions that you make every day, every week, and every month.

If that sounds like you, and you're not an emotionless cyborg, then you absolutely must have a plan to avoid selling in a panic at the bottom. You must plan ahead for when you'll sell... and it better be way before all those poor folks who panic at the bottom.

Before long, it'll be too late... It'll be clear by then that the market top is long in the past.

Good investing,

Dan Ferris

Editor's note: Dan says the market is deep in "bubble" territory – and no matter when the crash arrives, out-of-control inflation is already destroying your wealth. But he believes one specific "game plan" could help protect your hard-earned savings...

It has nothing to do with options... short selling... or perfectly timing the market. Put simply, this group of stocks is practically designed to beat inflation – and Dan expects it could outperform everything else in the market over the next five to 10 years. He discussed everything you need to know in a brand-new presentation, available for a limited time only. Get the details here.