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Posts Tagged ‘bull market’

You have probably read that September’s performance, after having a horrid August, was the second best on record for the Dow Jones. The bulls are running hard with this headline as means to spur optimism. They want you and all of your money invested. It is the good times again and we have momentum in our sails. Well, I went back and did a little research. Dating back to 1929, there have only been 4 instances where the stock market has increased greater than 5% in the month of September.

1939 = 13.47% record – occurred during a long-term bear market
2010 = 7.7% – occurred during a long-term bear market
1954 = 7.36%- occurred during a long-term bull market
1973 = 6.7% – occurred during a long-term bear market

1939 and 1973 were both years that were caught up in a long-term bear markets. What is a long-term bear market? It is a long period of time (usually on average of 15 to 20 years) where the market goes either down or nowhere at all. I would suggest that we started a long-term bear market in January 2000.

You can contrast long-term bear markets with a long-term bull market where the market goes up over a long period of time. Said another way, they both represent long period of times where it is either good or bad for investors.

Following those big September months, the following occurred:

September 1939 – The Dow Jones made a top in that month and proceeded to decline -40% into a bottom April 1942.

September 1973 – The Dow Jones saw a top the following October and proceeded to decline -36% to a bottom in December 1974.

The only exception to the rule was in 1954 which was in the middle of a long-term bull market. It continued to increase in value.

With everyone pulling out the party hats, as an investor, you might want to start looking for the valet ticket. The police are on the way and this party might just be getting ready to get busted up.

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When mutual fund managers are very positive on the market, historically they have kept lower levels of cash on hand in their portfolios. Watching these levels has been a very good predictor of where the stock market might be heading. Consider these statistics that date back to 1961.

Throughout the 60’s, mutual funds held on average 5 to 6% of their portfolios in cash. In some instances, it was as high as 9% to 10%. Cash levels of 4% or lower was a precursor to a market decline. In other words, when mutual fund managers held around 4% of cash, it was a signal that the stock market was about to go into a bear market or at least go through some type of a decline.

The following is from a newsletter I wrote to my clients back in 2007 right before the start of the greatest bear market since the Great Depression.

In 1971, these cash levels went as low as 4% and a -9% decline followed.
In 1972, these cash levels went as low as 3.9% and a -42% decline followed.

Then the cash levels went back up to the average of 8 to 10% again for a very long time until April 98. At that point they went back under 5% for the first time in 21 years. Following that dip down to 4.8% of cash, the market dropped -19%.

Then between 1998 and March 2000, the cash levels stayed in the mid to upper 4% ranges. March 2000, saw the first dip down to 4% cash level in almost 30 years. Of course, that occurred at the top of the great bull market run that led to a -47% decline in the stock market.

In September 2005, we set another record low in cash levels of 3.8%. That led to a mild decline of -5.2%.

In March 2007, we are now at a new record of 3.7%. Does that mean we have a bear market in our future? History would suggest that we have some type of stock market trouble in our near future. The irony is that we are at an all-time in the Dow just like we were in March of 2000.

Fast Forward to Today

So, wonder where we are today? We are currently at a record low level of cash in mutual funds at 3.6%.

NEW BULL MARKETS DON’T START UNTIL CASH LEVELS IN MUTUAL FUNDS ARE CLOSER TO 10%.

That is not an opinion. That is what history has shown. With that said, I would be careful with the risk that you are taking. Things can change very quickly.

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Financial analysts are now comparing our current stock market to that of 1982 drawing the conclusion that we are in a brand new long-term bull market cycle.  That would be great and all.  However, there are two main ingredients that are missing to make that assessment accurate. 

Back in 1982, the brand new bull market cycle started and lasted until 2000.  Today, the environment is not even remotely the type of environment that would support a new cycle.  Let’s start with interest rates.    The federal funds rate in 1982 was 18% and could only go down which would produce a boom in the economy.  Today we are at 0%.  The Fed has no place to go but up with interest rates.  The energy that a falling interest rate would produce to help buoy stocks just isn’t there.  This time around interest rates would act as a barrier to further growth. 

The other sticking point in the argument of a new bull market is the PE ratio.  I will resist getting into the mechanics of how a Price to Earnings Ratio works and its relation to the stock market.    The bottom line is that new bull markets start when PE ratios are low.  Bull markets end when the PE ratio gets too high.

 The top of the bull market in 2007         P/E was 25.5

The top of the bull market in 2000         P/E was 44.2 (due to internet bubble)

The top of the bull market in 1966         P/E was 24.1

The top of the bull market in 1937         P/E was 22.2

The top of the bull market in 1929         P/E was 32.5

The top of the bull market in 1902         P/E was 25.1

According to Robert Schuler’s valuation model which looks at reality and makes no assumptions about the future, the current P/E ratio is 25!  

This market is not cheap nor supportive of a new bull market. 

This week look out for earnings season.  We are in the beginning stages where companies report their good or bad news.  Thus far, earnings season has not been as expected.  Also keep an eye on the special elections in Massachusetts.  If the Republican wins that Senate seat, the Obama agenda would take a serious hit.  A win here by Republican Scott Brown would change everything.  I suspect the markets would like that outcome.   

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With a new year the predictions are everywhere.  Will the economy continue to stabilize? Will the stock market continue to go up? What are the pros saying? It is what they are saying as a majority that has me the most concerned. This is the time of the year where everyone is predicting how the new year will turn out. Personally, I am a recovering prognosticator and refuse to predict anymore after the bad predictions from last year. Granted, I was right about the first quarter and the continuation of the bear market. However, I couldn’t have been more wrong about what happened at the lowest point in March. So, let’s take a look at the prediction business and have some fun.

First, this is what concerns me. There is an old saying that goes like this – “When everyone thinks the same way, usually everyone is wrong.” Today everyone thinks there is no risk in the market. Everyone is bullish. In fact, today the level of optimism is higher than in October 2007 (top of the bull market), than in January 2000 (top of a bull market), and in August 1987 (two months before the second largest stock market crash on record.) When everyone is optimistic or pessimistic, things usually change. Danger – everyone is packed into a crowded party. What are you going to do when someone yells FIRE!?

Unusually High Levels of Optimism

I heard one analyst this morning who was just gushing with optimism about how high the stock market is going to go.  Then in the same breath he said: If we continue to see the same type of economic numbers going forward, I am very positive about the stock market.

Let me state the same thing in football terms. If the Dallas Cowboys continue to play the way they are playing now, I am very optimistic that they are going to the Super Bowl. What are the probabilities that the Cowboys are going to continue to play the same way? Minus the fact that Wade Phillips is unproven as a head coach that can take a team to the championship, I think that they are good. Things are clicking for the Cowboys. What are the chances that the economy is going to continue to improve? The economy is improving on the heels of a big shot of Government intervention that has created this false level of growth in the economy. I will not bore you with the long list of risks to investments today.

I will just ask one question. What are the chances that we just cruise on through without any ill effect of the debt crisis and continuing irresponsibility of the Government bail-out and cover up programs? Well, only time will tell. The quality of a prediction always comes down to the assumptions that are being made. I think that it is extremely risky to assume and base the fate of your investments on the probabilities that things are just going to run along smoothly in this economy when we face an unprecedented amount of challenges.

Next week – As I wrote earlier, I am out of the prediction business. However, I will present you next week with what I think are the probabilities for 2010 and what you need to put on your radar. Incidentally, tomorrow on the Prudent Money blog I will follow up with the counter argument to the point I am making today. Make sure and catch it.

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Back in March of this year when the stock market found a bottom, I posed a question that I felt would be “the” question for investors. Is this a bear market rally or is this the beginning of a bull market?

I have felt all along that this is nothing more than a bear market rally. A bear market rally is a pause in the bear market where the stock market goes up for a period of time.  Think of it as the bear resting and gathering energy for the next big decline. 

Of course, if it is a new bull market, then the March low of this year was the worst that it will get. 

I believe that we might be getting close to finding out.  Many of the indicators are stating that the moment of truth is here.  If this were a healthy normal market, we would at least see some type of market decline in the course of a new bull market.   I think that we might have already started that process.  If this is a bear market rally, then this decline will morph into something serious.  This should be a big test. 

For this stock market to change from a bear to a bull, the important level for the S&P 500 to reach would be 1121.  The S&P 500 would have to surpass that level and stay above that level.  If that were to occur, the evidence would support a major change for the stock market trend.

The unemployment numbers came out again this past Friday and showed more disturbing news for the economy.  Remember, if they cannot fix unemployment, this economy is going to have a tough time getting going again.  Unfortunately, Obama’s answer to more jobs is Government jobs through the stimulus program.  That is not the type of solution that will solve this problem.   

According to the Government’s “version” of the unemployment report, we lost 216,000 jobs. Of course, that was after they “added” back in 118,000 jobs that they created out of thin air.  As a review, each month the Government “estimates” the number of jobs created each month that they “feel” the Department of Labor misses.  It is such a farce. 

The number of those jobless as well as the overall unemployment rate is much higher than reported.  It is an absolute joke that they continue to report this garbage. 

I wanted to give you a link to an article about Robert Prechter.  He is a well regarded market analyst that has called major tops and bottoms of the market.  He uses a discipline called the Elliot Wave Theory. According to Elliot Wave, we have again hit a major top and it is about to get ugly.  Who knows if this is right or not?  I do know that he has a very strong track record and warrants some attention. 

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Since we changed the daily stock market outlook to a stock market alert format, there really hasn’t been much to “alert” you about concerning the markets.  So, I thought I would just start off this Monday with a quick update.  This should be a relatively quiet week with very little breaking economic reports being released.  Since May 8, the S&P 500 has dropped about 50 points.  From the standpoint of what the S&P 500 has been doing over the past 9 weeks, that really wasn’t that big of a deal.  I want to circle back around to the one question that every investor should have in the forefront of their minds.

Is this the start of a new bull market or just a bear market rally that precedes another bear market route?   The answer to that question would determine every decision you make concerning your investments.  The best way to start answering that question is by looking at price levels.  If you are new to this market commentary, price levels are very easy to understand.  First, I always focus just on the S&P 500 and we always look at what price level the S&P 500 closes at each market day.  The S&P 500 closed on Friday at a price level of 882. 

Price levels are road markers that tell us where we are on the journey of investing.  If we successfully pass the right price levels, then we know we are on our way to our destination.  However, if we start passing road markers or price levels going backwards (losing money), we need to assess if we are lost and off of the correct road.  So, we look at the price levels that represent caution, a positive outlook for our journey, or a negative outlook. If our road markers are showing that we are on a good road, then we stay the course.  If the road markers (price levels) are starting to show yellow signs or caution, then that means we might need to change the course of our journey.  We do that simply by changing our investments.  If the road markers or price levels show we are lost, we want to change directions.

So, the road marker or price level that would warrant caution for investors is anything below 875.  Last week, the decline did not go that far.  A positive for the stock market would be anything over the price level of 950.  So, let’s see where a week of mild economic reports takes us.

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Hello, my name is Bob Brooks, and I am a gloom and doomer. 

Well, sometimes I feel like I need to go to a 12 step group.  While everyone is popping the champagne bottles on Wall Street and the market puts in yet another strong day, I still stick to my guns about what is occurring.  So, let me give you a few possibilities in the near-term.

1)  The market falls apart on some pretty bad news and heads back down to the March lows. 

2)  The market declines for a period of time.  However, it does so constructively and then continues the bear market rally to new highs.  This could end up taking a few months, but it would ultimately return back to the bear market.  Of course, no one will even entertain that notion.  However, that is what a bear market does.

3)  We are in a new bull market, never to return to the bear market decline.  The worst is behind us. 

The market is not only at a dangerous spot right now but it faces some very big news.  We have an unemployment report this Friday and then we have the results of the stress test.  I am going to make an off the wall prediction.  I think that the Government will tinker with the unemployment numbers to actually make them look very good in order to offset the bombshell that they will drop with the stress results.  They keep changing the date of the release of this information which makes one wonder what is actually occurring.  Why in the world would they release this information the same day as the unemployment report?  Once again, it doesn’t make sense.

This morning pending home sales came out pretty strong and all of the sudden the real estate crisis is over with.  I wouldn’t jump on that party wagon just yet.  Bryan Rogers, who does all of the wonderful graphics and artwork for Prudent Money, made an interesting statement to me.  He said you have to take all of the technical analysis that you follow and add in the deceptive media element. 

I might turn out looking pretty foolish with my negative outlook.   However, I did not feel different in August and September of 2007.  Everything is not always what it seems!

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Well, yesterday continues a strong performance for the stock market.  Remember we are still focusing on one question.  Was the low in the stock market in March the bottom of the bear market and the start of a new bull market or was the stock market rally that started in March nothing more than a bear market rally?  This is one of the most important questions to continue exploring at this juncture. There are huge risks for either answer. 

If you are not properly invested and this is the new bull market, then you are really missing out on recouping your losses.  If this is nothing more than a bear market rally, then the potential for extreme losses for stock market investors still lie ahead. 

For those of you who read my daily outlook blog, you know that I believe this is a bear market rally and a great opportunity for those who are heavily invested in stock to take advantage of this big move in the market and reduce your risk by selling stocks or stock mutual funds. 

As I started writing last week, my indicators are flashing caution right now and suggest that the risk continues to climb for anyone invested in stocks.  The market is truly ignoring some negative items.  Growth for the economy was announced yesterday much worse than expected.  We had -6.1% growth last quarter and the growth numbers for the first quarter were revised and reflect a worse first quarter than originally reported.  The last 6 months were the worst since 1958.

Foreclosures are climbing.  Swine flu should now be on every investor’s radar as this is just about to be classified as a pandemic.  The first of what I believe will be two automakers declared bankruptcy this morning.  The Government is going to be selling 71 billion dollars worth of government securities next week (read: printing money).  Finally, unemployment continues to weaken as evidenced in this morning’s new weekly jobless claim numbers (another record). 

All of this is occurring, and the consumer confidence number increased by 50% with the highest read since November 2005?  Are you kidding me?  As I have written many times, there is a great deal of evidence that exists that economic numbers are doctored.  There is just no plausible explanation for a rise by that much during a time with this much negativity.  However, keep in mind, we just “celebrated” (it certainly seems that way) President Obama’s 100th day in office.  It sure would be fitting for the stock market to have made money in his first 100 days as well as a huge rise in consumer confidence due to everything he has done in office.  HMMMMM…I follow this data very closely and it doesn’t add up.  It looks more and more like an organized PR campaign.  Let’s just all hold hands and believe there is no risk and the government will take care of everything.  If you are not paying attention to what is occurring out in front and behind the scenes please start doing so. 

Agree or disagree and think I am a conspiracy nut, things don’t add up.  I am just writing what I am seeing and staying away from the kool-aid that is being consumed in mass quantities.  For now, be careful with your risk.

with your risk.

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There is not a whole lot to add in today’s blog.  The trend or direction of the stock market has been stuck between some important (at least in the short-term) price levels.  Remember that price levels are nothing more than mile markers.  If you were traveling, you would look for mile markers.  If you are passing up the right mile markers, you know that you are on the right track.  If you are passing up the wrong mile markers, you are probably going the wrong way.  So, we look at mile markers for the stock market to see if we are heading in the right direction, which would be up.

So a stock market close (the price level at the end of the day) of 875 or greater would be short-term positive.  A stock market close below 825 and above 800 would call for some caution.  A stock market close below 800 could be the start of something negative for the stock market.

Don’t forget the main questions that we are trying to answer.  Is the bear market over?  Has a new bull market started?  Are we just in a bear market rally and days or weeks from turning back into a negative bear market where the stock market could experience steep losses? 

We are also always looking at what direction the market is going in the short-term, the medium-term, and the long-term.  Right now, this is how I see it stacking up.

Short-term – Positive or bullish

Medium-term – Negative or bearish

Long-term – Negative or bearish

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I typically post in the morning and write about the prior day’s market action in addition to the morning economic news.  I am writing this Tuesday night because I am speaking at a conference in Fort Worth Wednesday morning, which will fill most of my morning.

 

So, Wednesday we will get another look at inflation numbers with the Consumer Price Index report.  Tuesday we saw the Producer Price Report numbers.  I wrote about them in my blog.  The Consumer Price Index tells what is happening to prices (rising or falling) at the consumer level.  It will be interesting to see if the CPI numbers look as deflationary as the Producers Price Report.

 

Tuesday, it wasn’t a very pretty day on Wall Street.  The big questions are:

 

–  Is this the start of a new bull market and the bear market is over? 

–  Is this just a bear market rally?

–  If it is a bear market rally, when will it be done and how bad will the next part of the bear market be for investors?

 

Daily price levels give us clues about the future direction of the market.  Remember price levels are like road markers.  They tell us if we are headed in the right direction or not.   My opinion is that we are in a bear market rally and this bear market rally is nearing the end.

  

We are always looking at the CLOSING price level of the S&P 500.  Tuesday the S&P 500 closed on an important price level of 841.  It will be interesting to see what happens from here.  We might be getting ready to go down to 800 and “test” that price level.  If the market can stay above that level, that would be a positive sign.  If not, look out below.  We will have to wait to see what Wednesday brings.

 

 

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