What Kind of Bull Market Is This Anyway?

It's getting to be that time of year. The time when investors start peering into their crystal balls in order to try and ascertain what might be in store for the next year.

While making predictions about what the stock market might or might not do over a twelve month period tends to be a fool's errand and it is never a good idea to invest according to such predictions, it does make sense to occasionally take stock of the current cycle from a big-picture standpoint.

With the major indices all sitting at or near all-time highs, it is safe to say that stocks are in at least some kind of a bull market. The chart below showing the S&P 500 on a monthly basis since 1989 makes this point pretty clear. Remember, if it walks like a duck and quacks like a duck, it is probably...

Not exactly ground-breaking analysis, right? However, the key question at this stage of the game is whether or not stocks are enjoying a "secular" bull market (one that lasts at least ten years - think 1982 to 2000) or a more run-of-the-mill "cyclical" bull?

The answer to this question is important if one's crystal ball is to be useful at all in terms of next year's predictions.

However, the problem is that it is difficult to know the answer to this question for certain without a heaping helping of hindsight. Currently, there are a handful of indications that the indices have indeed embarked on a new secular bull run. And if this turns out to be the case, then the game is likely to be very enjoyable for at least another five to ten years.

But, since one can't know for sure about such things, it is probably a good idea to focus on the question of whether the current joyride to the upside has been one long bull market that began in March 2009 or two bull markets separated by the big dive in the late-summer of 2011.

The question of the day is illustrated on the chart below:

Some analysts argue that stocks have been in a bull market since March 9, 2009. This scenario is represented by the green trend line on the chart above.

Under this scenario, the S&P has gained approximately 165.5 percent over the past 1,733 days. Not bad, eh?

Other analysts argue that the 19 percent decline seen in the summer of 2011 qualified as a bear market. Thus, the current bull run is only 760 days old and sports a gain of 61.2 percent.

Why Does This Matter?

While such a distinction may seem trivial, from an historical perspective it is kinda important.

You see, since 1900, the average "cyclical" bull market (defined by Ned Davis Research as a gain of at least 30 percent in the Dow Jones Industrial average after 50 calendar days or a gain of at least 13 percent over 155 calendar days) has, on average, produced gains of 85.9 percent over 752 days.

So... those who argue that the bull began back on March 9, 2009 need to admit that the current gain of 165 percent over the past 1733 days means this bull is clearly VERY old and due to take a break at any time.

However, if one believes that the current bull began in August, 2011, the situation is a bit different. From a calendar-day standpoint, the current cyclical bull is just now "average" in terms of age. And the good news is that since the average bull gains nearly 86 percent, there is still some upside potential left - based on historical averages, of course.

Even if one argues that the current bull run qualifies as a secular bull market, it is important to recognize that this move is getting long in the tooth. History shows that the average cyclical bull that occurs within a secular bull market lasts only 1024 days and gains 110 percent.

Place Your Bets

The bottom line here is it's time for investors to place their bets. If one believes the bull started in March 2009, then they must bet on the current run being one for the ages. Whereas if you believe that the current bull began in 2011, there may be some room left to run - even if this turns out to be an "average" bull market.

In any event, the key here is to recognize that the current joyride to the upside could easily encounter some bumps in the road. And if history is any indication, it might be a good idea to consider the old say, "Sell in May and go away."

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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 Policy
      2. The Outlook for Economic Growth

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: Neutral
(Chart below is S&P 500 daily over past 1 month) Intermediate-Term Trend: 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)

The State of the Tape

The Early Warning Indicators

The State of the Market Environment

Weekly State of the Market Model Reading: Positive

Thought For The Day...

For a man to conquer himself is the first & noblest of all victories -Plato

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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: 1760-40
  
• Near-Term Resistance Zone(s): 1775

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: Neutral
  
• Price Thrust Indicator:Moderately Positive
  
• Volume Thrust Indicator:Negative
  
• Breadth Thrust Indicator:Negative
  
• Bull/Bear Volume Relationship: Moderately Positive
  
• Technical Health of 100 Industry Groups:Moderately Positive

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.

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.

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Wishing you green screens and all the best for a great day,

David D. Moenning
Founder and Chief Investment Strategist
StateoftheMarkets.com

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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The opinions and forecasts expressed are those of David Moenning, founder of StateoftheMarkets.com and may not actually come to pass. Mr. Moenning's opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts expressed are those of the editors of TopStockPortfolios and may not actually come to pass. The opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security nor specific investment advice. One should always consult an investment professional before making any investment.