Has a New Secular Bull Market Been Born?
Dave Moenning had the honor of being invited to present at this past weekend's Trader's Forum in Chicago, Illinois, put on by Trader's Library. This type of event is a great opportunity to interact with both students and fellow investment professionals on the outlook for the stock market as well as investing/trading strategies.
While the strategies people discussed were many and varied, when the discussions inevitably turned to the outlook for the stock market, the same song was heard over and over again. In short, despite the stock market enjoying one of the best years in a long time and having put up big numbers since March 2009, most folks expect the current bull market to end badly - and soon.
Fighting the Last War
Several of the investment pros that attended over the weekend are very successful. However, unless they had very gray hair, most still expect the stock market to remain in the boom/bust pattern that has been seen since 2000. Think about it; unless you have been investing for more than fifteen years, you only know a market that crashes in horrific fashion, recovers for a few years and then crashes again. As such, most of the people in the room are bracing/preparing for the next bear market.
In Wall Street parlance, this is referred to as "fighting the last war." In other words, the majority of investors are now very prepared for the next 30 percent drop in the S&P 500. And because of this, it's easy to want to declare that we won't see another big, bad bear market for quite some time.
Lest we forget, the stock market has only experienced three brutal bear markets in the last 25 years. There was the crash of 1987, the tech bubble bursting in 2000-02 and the credit crisis debacle of 2008. But since two of those declines came in a nine-year period, everybody expects the uber-bears to continue to show up.
Big, Bad Bears Require a Reason
Although everyone in the room agreed that the algos can push the stock market around at any point in time, oftentimes for little or no reason, folks needed to be reminded that the really nasty declines in the market are usually accompanied with a darn good reason. Put another way, the S&P 500 doesn't dive 40 percent just for the heck of it. No, there is generally an issue behind the really big moves - in both directions.
The State of the Markets" presentation pointed out the secular periods since WWII and tried to make the point that a secular move in either direction doesn't last forever. There was a secular bear market from 1966(ish) to 1982, a secular bull from 1982 through 2000, and then the secular bear that began in 2000. The key point was that the current boom/bust secular bear cycle may be changing.
To be sure, we won't be able to know whether this is true or not for years to come. But the younger compatriots (who have never been exposed to a secular bull environment) were told that if a secular bull has begun, the game is about to get very fun. This pronouncement brought smiles as well as a fair amount of skepticism. An explanation was required that in a secular bull period, the "cyclical" or "mini" bear markets are short and sweet.
Sure, the market gets tagged for losses of 20 percent or more on occasion. However, the losses tend to be recovered in relatively short order. As such, a "buy the dip" strategy was suggested as what would become a key big-picture approach.
The Constant Interruptions
In order to justify long-term optimism, it was suggested that if the U.S. economy hadn't been interrupted by the European debt mess during the summers of 2010, 2011, and 2012, we would likely be seeing stronger economic growth by now. It was opined that it was the severe correction of 16 percent in 2010 on the back of the first Greece crisis that caused consumers to crawl back into their caves.
It was also suggested that what is called the "mini bear" of 2011 (where the S&P 500 dove 19 percent in very brief time), which was caused by the dynamic duo of Europe and the U.S. debt downgrade, also caused the economy to stop on a dime.
Each crisis caused the stock market to tank very quickly. This kept the fear created from 2008 to remain fresh in the minds of consumers. As a result, confidence remained weak. And when confidence is low, companies don't hire, consumers don't spend and the nation's GDP slows to a crawl. However, it was contended that if the European debt crisis had not caused the market meltdowns and the GDP slowdowns, our economy would probably be humming along by now.
If It Walks Like a Duck and Quacks Like a Duck...
The bottom line is that the economy is moving forward at the present time. In addition, a great many economist expect the pace of the recovery to improve in the coming quarters. And if this turns out to be the case, then earnings will likely perk up as well, which, in turn, well...you get the idea.
One bear argument is that the economic recovery is already getting old and thus, is susceptible to another recession. However, it is important to recognize that economic recoveries don't die of old age. No, they typically die from a tightening of monetary policy and/or financial or economic shock. In fact, the last three economic recoveries lasted 7.7, 10.0, and 6.1 years respectively. So, the fact that the current recovery is now entering its fifth year isn't necessarily a bearish omen.
Other reasons to be hopeful that a secular bull has begun include the following:
- Monetary policy will remain accommodative for the foreseeable future (remember the Fed has said it has no plans to sell many of the securities on their balance sheet)
- The economic expansion will likely be longer than normal (Ned Davis Research Group projects the current expansion will run through 2017)
- The credit cycle has turned positive
- The housing market has turned
- The automobile buying cycle has turned
- U.S. Manufacturing is improving
- The demographic trend is turning positive for a decade or so
- Europe's recession is not as severe as had been feared
- No hard landing in China
- Japan's QE-Infinity
- The dollar's decline may be ending
These topics may be expanded upon in coming missives. However, the bottom line is if the market continues to make new highs and those highs are confirmed by global markets, then we may have to be willing to recognize that a new secular bull market is upon us. One can hope, right?
Current Market Drivers
We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).
1. The State of Fed/Global Central Bank Policies
2. Syria/Geopolitical Issues
3. The Outlook for the U.S./Global Economy
4. The Level of Interest Rates
The State of the Trend
We believe it is important to analyze the market using multiple time-frames. We define short-term as 3 days to 3 weeks, intermediate-term as 3 weeks to 3 months, and long-term as 3 months or more. Below are our current ratings of the three primary trends:
Short-Term Trend: Positive
(Chart below is S&P 500 daily over past 1 month)
Intermediate-Term Trend: Moderately Positive
(Chart below is S&P 500 daily over past 6 months)
Long-Term Trend: Positive
(Chart below is S&P 500 daily over past 12 months)
Key Technical Areas:
Traders as well as computerized algorithms are generally keenly aware of the important technical levels on the charts from a short-term basis. Below are the levels we deem important to watch today:
- Near-Term Support Zone(s) for S&P 500: 1680
- Near-Term Resistance Zone(s): 1700-1710
The State of the Tape
Momentum indicators are designed to tell us about the technical health of a trend - I.E. if there is any "oomph" behind the move. Below are a handful of our favorite indicators relating to the market's "mo"...
- Trend and Breadth Confirmation Indicator: Positive
- Price Thrust Indicator: Positive
- Volume Thrust Indicator: Moderately Positive
- Breadth Thrust Indicator: Positive
- Bull/Bear Volume Relationship: Moderately Positive
- Technical Health of 100 Industry Groups: Moderately Positive
The Early Warning Indicators
Markets travel in cycles. Thus we must constantly be on the lookout for changes in the direction of the trend. Looking at market sentiment and the overbought/sold conditions can provide "early warning signs" that a trend change may be near.
- Overbought/Oversold Condition: The S&P 500 is overbought from a short-term perspective and is neutral from an intermediate-term point of view.
- Market Sentiment: Our primary sentiment model is neutral .
The State of the Market Environment
One of the keys to long-term success in the stock market is stay in tune with the market's "big picture" environment in terms of risk versus reward because different market environments require different investing strategies. To help us identify the current environment, we look to our longer-term State of the Markets Model. This model is designed to tell us when risk factors are high, low, or uncertain. In short, this longer-term oriented, weekly model tells us whether the odds favor the bulls, bears, or neither team.
Weekly State of the Market Model Reading: Neutral - This tells us to be cautious at this time and stay focused on the price action.
If you are looking for a disciplined, rules-based system to help guide your market exposure, check out The Daily Decision System.
Turning To This Morning...
The focal point in the markets since Sunday evening has been the withdrawal of Larry Summers for consideration to be the next Fed Chairman. In light of the fact that Summers was seen as more hawkish than either Janet Yellen or Donald Kohn (who are considered to be the architects of the Fed's current policy), stocks like the idea that there isn't likely to be a change in monetary policy come January. Thus, European stocks are rallying and U.S. futures point to a strong pop at the open. However, we will get some fairly important economic data this morning, so be sure to stay tuned.
Here are the Pre-Market indicators we review each morning before the opening bell...
Major Foreign Markets:
- Japan: closed
- Hong Kong: +1.47%
- Shanghai: -0.23%
- London: +0.94%
- Germany: +1.26%
- France: +0.98%
- Italy: +0.77%
- Spain: +0.61%
Crude Oil Futures: -$1.49 to $106.72
Gold: $3.20 to $1311.80
Dollar: higher against the yen, lower vs. euro and pound.
10-Year Bond Yield: Currently trading at 2.803%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +19.56
- Dow Jones Industrial Average: +184
- NASDAQ Composite: +32.48
Thought For The Day...
A happy person is not a person in a certain set of circumstances, but rather a person with a certain set of attitudes. -Hugh Downs
Looking for Guidance in the Markets?
The Daily Decision: If you want a disciplined approach to managing stock market risk on a daily basis - Check the "Daily Decision" System. Forget the fast money and the latest, greatest option trade. Investors first need is a strategy to keep them "in" the stock market during bull markets and on the sidelines (or short) during bear markets. The Daily Decision system was up 30.3% in 2012, is up more than 25% in 2013, and the system sports an average compound rate of return of more than 30% per year.
The Insiders Portfolio: If you are looking for a truly unique approach to stock picking - Check out The Insiders Portfolio. We buy what those who know their company's best are buying - but ONLY when they are buying heavily! P.S. The Insiders is up over 30% in 2013 and has nearly doubled the S&P 500 since 2009.
The IRA/401K Advisor: Stop ignoring your 401K! Our long-term oriented service designed for IRAs and 401Ks strives to keep accounts positioned on the right side of the markets. This is a service you really can't afford not to use.
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Wishing you green screens and all the best for a great day,
David D. Moenning
Founder and Chief Investment Strategist
For up to the minute updates on the market's driving forces, Follow Me on Twitter: @StateDave (Twitter is the new Ticker Tape)
Positions in stocks mentioned: none
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