When Bull Markets Die: What To Watch For, What Stocks Could Be The First To Get Hit

The current bull market is about 9 years old, having the honor of being the second longest since the end of World War II.


While a bull market is one in which prices are expected to keep rising, technically, it is declared when asset prices rise over 20 percent from their lows.

A bull market is characterized by increasing investor confidence and optimism concerning continued strength in asset prices. Usually, a bull market coincides with economic expansion. In fact, the bull market is considered a leading indicator of an economic expansion.

Longevity And Returns — 1990s Bull Market Takes The Cake

Argus in a recent note said that since WWII there have been 12 bull markets. The daddy of all the bull markets during this period was the bull market that spanned between 1991 and 2000. The average life span of these 12 bull markets is 58 months.

Explaining the reason behind the longevity of the 1991-2000 bull market and the current one, Argus said the Fed's accommodative monetary policy was responsible in part.

The firm also said the average return of the 12 bull markets is 149 percent, with the 1990's bull market clocking a return of 417 percent. The S&P 500's current bull market stands second but is closely followed by the 1949–1956 bull market.

No Fear Of Death For Current Bull Market

Even as a longer bull market conjures up visions of an imminent crash, Jim Kelleher, director of research at Argus, feels it is not the age that determines the death of a bull market. Recession, inflation or those factors that severely impair profit growth usually signal the end of a bull market.

Pointing to the fact that the economy is chugging along nicely, Argus said the current bull market is relatively safe. The economy has settled down to a period of slow growth, with the economy averaging annual GDP growth of 2 percent since the Great Recession. Inflationary pressure is curtailed due to moderate job growth, restrained wage growth in higher-skilled positions, the Fed's gradual tightening of monetary policy and its move to shrink its balance sheet.

See also: Current Economic Expansion Into Its Ninth Year; How It Fares Compared To Predecessors

Assigning Value To The Bull Market

At the S&P 500's current value of 2,500, Argus noted that the current bull market is about 3 percent above its fair value calculation in the 2,425 range. The fair value, according to the firm, was calculated based on normalized earnings of $1.28, which is the 5-year average earnings from continuing operations for S&P 500 companies.

"Looked at another way, the S&P 500 trades at 19.2-times trailing earnings on a long-term basis. At present, the S&P 500 trades at about 19.8-times trailing S&P 500 earnings from continuing operations and at about 19.5-times our normalized earnings calculation," Argus said.

Therefore, the firm thinks the current bull could begin to top out somewhere around 2,650 to as much as 2,800 on the S&P 500.

Citing the solid, if unspectacular, earnings prospects and economic fundamentals, Argus said it expects the S&P 500 to eventually move on from the current 2,500 level. The firm also referred to Argus Investment Strategist Peter Canelo's view that the S&P 500 could potentially peak near 2,680–2,780 over the coming six months and 2,740–2,840 within a year.

Market Darlings To Suffer If Bull Run Snaps

Argus indicated that if the stock market begins to unravel, the first stocks to sell off will likely be the current group of market darlings.

Benzinga looked at some overbought S&P 500 stocks, which face the grave threat of seeing a steep selloff in the eventuality of a stock market correction. The year-to-date gain was considered for stock screening.

    1. Vertex Pharmaceuticals Incorporated VRTX: Up 106.41 percent.
    2. NRG Energy Inc NRG: Up 97.31 percent.
    3. Align Technology, Inc. ALGN: Up 93.82 percent.
    4. Activision Blizzard, Inc. ATVI: Up 77.54 percent.
    5. NVIDIA Corporation NVDA: Up 69.35 percent.
    6. Wynn Resorts, Limited WYNN: Up 68.07 percent.
    7. Alcoa Corp AA: Up 64.71 percent.
    8. Boeing Co BA: Up 64.47 percent.
    9. Micron Technology, Inc. MU: Up 63.82 percent.
    10. Paypal Holdings Inc PYPL: Up 63.74 percent.

The top performers among the S&P 500 companies, incidentally, belong to sectors as diverse as pharma, energy, video game, leisure & entertainment, technology, material and payment processing. These list of companies could also be run through a list of fundamental tests to decide how probable the pullback could be.

Related Link: An ETF Star Of The Bull Market

Posted In: ArgusJim KelleherEducationTop StoriesMarketsAnalyst RatingsTrading IdeasGeneral

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