Investing

This Wall Street legend's 10 rules for investing are very applicable to today's bull market

Key Points
  • Investing legend Bob Farrell's 10 rules for investing are still passed around on Wall Street today and ring true for the current bull market.
  • "Markets are strongest when they are broad and weakest when they narrow to a handful if blue-chip names," Rosenberg Research pointed to Farrell's seventh rule in a note to clients Monday.
  • Apple, Google parent Alphabet, Facebook, Microsoft and Amazon make up nearly 20% of the entire S&P 500 market cap, the highest concentration since the dot-com bubble peak in 2000.
Tourists take a picture with the market bull near the New York Stock Exchange in New York City.
Spencer Platt | Getty Images

For decades investing legend Bob Farrell was a top Wall Street strategist known for predicting changes in overall stock market direction.

Farrell, 88, was the chief stock market analyst and senior investment advisor at Merrill Lynch, where he worked for 45 years. Farrell is well known for his work as a technical analyst, recognizing the importance of data and patterns.

Some would say Farrell was immortalized by his rules of investing that remain widely quoted today. His 10 trusty rules are still passed around on Wall Street and ring true for the current bull market, which marks the longest expansion in U.S. history.

"Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names," Rosenberg Research pointed to Farrell's seventh rule in a note to clients Monday.

Both the S&P 500 and Nasdaq reached all-time highs Monday, led by solid gains in tech shares such as Amazon.

Headlines boast that the major averages hit record levels, but fail to mention how narrowly based this bull market is, David Rosenberg, the firm's chief economist and strategist, noted. Apple, Google parent Alphabet, Facebook, Microsoft and Amazon make up nearly 20% of the entire S&P 500 market cap, the highest concentration since the dot-com bubble peak in 2000, Rosenberg added.

"Once it becomes apparent that these growth companies can't continue to grow by the multiples of nominal GDP that are currently priced in, the realization will send these stocks into a period of downward momentum that could be accentuated by a herd effect heading to the exits in these heavily populated indexed funds," said Rosenberg.

Cue Farrell's second rule, "excesses in one direction will lead to an opposite excess in the other direction." Rosenberg warned that every bubbles pops.

Some analysts think this year's 85% rally in Tesla's stock resembles a bubble-like scenario. Applying Farrell's second rule to Tesla could imply the stock will reverse these sky-high levels.

Here's a list of Farrell's 10 rules:

  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 and 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
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