Seven Signs This Bull Market Could Continue
by Louis Basenese, Small Cap and Special Situations Expert
Thursday, April 15, 2010: Issue #1239
Last April, I insulted some people when I wrote a column, suggesting that we were at “the start of a new bull market.”
For example…
- Gale W. refused to believe it because “the smartest analyst in the world” – not me – was telling her otherwise.
- Lee S. wished I were right. But he wasn’t willing to bet on it.
- And my favorite responder, Henry P., said, “Basenese must live in a parallel world, but one that is different, one in which delusion replaces reality… people that listen to you are going to be in for a very rude awakening.”
Well Henry, if a 74% rally is a rude awakening, I’ll let Chip from Animal House respond for me: “Thank you, sir! May I have another?”
Bottom line: This time last year, nobody wanted to believe that the fledging rally would continue. Pessimism prevailed. And they were dead wrong.
I believe the same thing is about to happen again…
Déjà Vu All Over Again
Even after 13 months of gains, countless investors still have no faith. They doubt the current bull market is sustainable. So much so, they even refuse to call it a bull market.
According to 249 news headlines over the past month, it’s a “melt-up.” (Melt-up? Could there be a phrase that oozes with more skeptical connotations?)
I’ve also heard it labeled “a cyclical bull market in a secular bear market.” Puh-lease! If a 74% rise for the S&P 500 doesn’t qualify as a full-blown bull market, nothing does.
If you share these doubts, stop kidding yourself. We’re in the midst of an historic bull market. One that’s very likely to continue. And here are seven reasons why…
1. It’s All About the Economy, Stupid!
Forget about a double-dip recession cutting off this rally at the knees. The latest economic data points to a recovery that is real and sustainable.
- Take Warren Buffett’s favorite indicator, for example – railroad freight traffic. It just hit its highest level since November 2008 – up 16.5% in the last week of March.
- Restaurant activity rose to its highest level in 27 months in February, according to the National Restaurant Association.
- The ISM Manufacturing Index touched a six-year high last month.
- New orders for manufactured durable goods increased for the third consecutive month, too.
- Industrial production jumped by a solid 2% in February.
- Last month, chain store retail sales logged their best year-over-year increase since 1999.
True, the unemployment picture still stinks. But it’s a lagging indicator. By the time it improves dramatically, the market will have left you in the dust.
2. The “Sesame Street” Indicator is Bullish
Oscar the Grouch loves trash! So do investors.
Case in point: The stocks that got battered and bruised the most during the market’s downturn are the best-performing ones coming off the bottom. Namely, financial stocks. In fact, most are up by double the amount of the S&P 500, if not more.
Of course, this typically happens in the first leg of a bull market. Junk outperforms high-quality companies. But it’s a well-documented fact that investors eventually start rotating into undervalued, steady performers.
There’s plenty of history to back this theory up, too. That’s exactly what happened after the early 1980s recession, the early 1990s recession and the early 2000 downturn, as well. The fact that it hasn’t happened on this occasion yet, means there’s plenty more upside ahead, as high-quality companies eventually take the baton.
3. Technically Speaking…
Although I favor fundamental analysis over technical analysis, that doesn’t mean I ignore technicals completely. After all, we never want to fight the trend. And technicals point to this rally continuing, too.
Take the advance/decline line, for example. It basically gauges the strength of a rally by measuring how many stocks are participating in it (also referred to as the market’s “breadth”). The line is currently very bullish. The last three times it’s been this bullish – in 1962, 1975 and 1982 – the market kept charging higher, according to Dan Sullivan of The Chartist. All the while, investors doubted the sustainability of the move.
Then there’s the common Wall Street wisdom to “never short a dull market.” In other words, don’t bet on a downturn just because it’s been a while since we had one. The bears would like you to believe that the market is overdue for a downturn, since we’ve gone 27 trading days without a 1% move. Let me put their argument in perspective…
We’re not even close to longest streak on record. Back in 1995, the S&P 500 went almost 100 days without a 1% move. So this “dull” market could keep heading higher for many, many more days.
4. Bring on the Stock Buybacks
Companies are spending the lowest proportion of their money on stock buybacks in almost a decade – 28% of operating profit. At the same time, they’re sitting on record amounts of cash – almost $1 trillion.
The good news is we’ve seen a pick-up in buyback activity in recent months. Mizuho Financial Group expects companies to double their stock repurchases this year – resulting in a total of $235 billion. We’re nowhere near a top, either. In 2007, companies spent almost $600 billion on buybacks.
Remember, buying back shares reduces the number of shares available and increases earnings by share. As a result, stocks often climb higher.
Long story short… the speed of buybacks is accelerating and there’s ample cash available to fuel many more. That definitely points to higher share prices ahead.
5. Stocks Are (Still) Cheap
The S&P 500 currently trades for about 15 times this year’s projected earnings, based on Bloomberg Data. If companies deliver the profits they’re promising, shares will need to rise in order to match the average price-to-earnings ratio of 20.6 since 1992.
Looking at this from another angle, we always tell Invesment U readers that share prices ultimately follow earnings. And with the average analyst in a recent Bloomberg survey calling for a 50% increase in S&P 500 earnings this year, stock prices could easily jump just as high.
6. Life Expectancy
The fact that the current bull market is now one year old is a big deal. The last 13 bull markets that lived that long ending up lasting an average of 4.4 years and returned 153%. This bull is still a baby in comparison.
7. The Herd is Clueless (Again)
We all know it’s bad to follow the herd. And right now, the herd is clueless. The entire time the market’s been heading higher, they’ve been plowing their money into bonds!
The latest data from Morningstar reveals that over 95% of the $377.4 billion flowing into mutual funds last year went into bond funds. Year-to-date money flows are similarly lopsided, with 71% going into bond funds.
Even worse, investors are withdrawing money from stocks to fund this strategy. In February, investors withdrew $3.7 billion from U.S. equity funds, the fifth outflow in six months.
So if you’re selling now, you’re investing right alongside the herd. Bad idea.
Be Invested Or Be Sorry
In the end, if you doubted my prediction last spring and sat on the sidelines, you missed out on a massive rally. Another bout of hesitance could mean missing out on more upside, which would be even more disastrous to your wealth.
So make sure you have some exposure to equities. Just be smart about it. Do these two things…
- Use position sizing.
- Use trailing stops.
By doing so, you’ll share in all the upside if I’m right. And if I’m wrong, you’ll limit your losses.
In my mind, that’s a far better proposition than running scared, parking everything in cash and getting paid nothing for it. As the saying goes, “Nothing ventured, nothing gained.”
Good investing,
Louis Basenese
Any investment contains risk. Please see our disclaimer.
8 Responses to “Seven Signs This Bull Market Could Continue”
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In addition to being the foremost expert on small-cap stocks, Louis is also well versed in special situations including IPOs, mergers and acquisitions, spinoffs and contrarian investments. His commentary has been featured in several media outlets, including MarketWatch. And he's also a top-rated speaker at financial conferences throughout the country. 
Bull market????? I want some of what you are smoking. We are still down 24% from the DOW 14,400 high. Even Helicopter Ben announced that the USA will be broke in 2020 due to 100% of GDP going to interest on our debt alone, and this doesn’t include the health care debacle yet.
Forward P/Es are based on expected earnings that will NOT materialize when consumers retrench from the second wave of housing defaults of the ARMs, Alt A’s, walking away from underwater home values.
You think the insiders selling like there is no tomorrow are stupid?
Mutual fund managers have no cash to invest.
The markets are overvalued by 20% to 40% depending on who you believe.
Indeed, you live in a parallel universe.
vince nania
st. louis
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Kudos, Lou! You are my hero. It’s all about attitude, and you’ve got the right one…. AND the stats to back it up! I always look forward to your insights and I plan on riding your coattails on this bonafide bull market. Soldier on!
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Lou is an optimist and is probably not yet in possession of the seasoning of time and age. He is using CNBC bull market reasoning. Fundamentals are looking good unless you look beheath the covers. Eventually the demand rot will catch up with the supply and the government will run out of money to continue to fuel this market (that is what has been driving it higher).
Hhis 3rd point about the technicals is dead wrong. I follow technicals from two different analysts. Only twice in the past 25 years have so many techical indicators pointed to a correction – August, 1987 and January, 2000. In both cases the market continued to rally for another 2 months. But these technicals have been in reversal mode for over a month so I suspect the turnaround is coming shortly. And the turnarounds from those two dates were significant which would have taken out 25% trailing stops. If I were to buy in now, I would use a tight trailing stop of no more than 10%.
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Great article. I have been reading a lot of bearish stuff lately, including HS Dent’s latest book, but the market keeps climbing a wall of worry. I remain nervously long stocks but have taken out some put option insurance. Lou’s analysis is refreshing in a climate dominated by gloom about the problems facing western economies, especially the US. Keep up the good work Lou.
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The seven points require a reality check and debugging. The herd effect is going full force. Sentiment is incredibly bullish. Small cap “trash” is not a positive. it is normally a sign of excess speculation leading to trouble. Stocks are not cheap after normalizing the earnings and historical multiples. Also, look at the dividend yield on the S&P. Raises may be coming but will not be enough to move it into respectability. Buy backs are great but rarely executed to reacquire higly valued stock. The programs are discretionary and the good ones benefits specific stocks over a very long period.If companies spend huge amounts on buy backs it is often asign thaat there is no other productive economic application available that produces a competive return. That is hardly good news from an economic perspective.
Non technicians should never use technical anecdotes to support their opinion. This is not a dull market. Then there is the terribly deficient volume which no one discusses. Regarding the advance decline line, the line is surging along. The parallel to 1982 is very misplaced and misleading. The market was lifting from a severe valuation compression. That is not the current condition. Also, there is that old saw holding that it is time to buy them when the new low list is bulging and time to sell them when the new high list is similarly bloated. We have an upward sweep resulting from concentrated action by accounts with direct and indirect access to free money along with tolerance for specualtion by those providing the access and the capital, namely the US Treasury and Government. Up is up and many have gone along for the ride. Record numbers have not been able to grab a ride this time. However, let us not delude ourselves about how this all was possible. It is an extraordinary confluence of elements that was every bit as extraordinary as though creating the last crisis. It is not sustainable and must be replaced with the creation of new wealth which is something we have not accomplished and is not likely in the near term. Half the population has no tax liability. Where is the new wealth?
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It’s useless to make such statement with no time frame attached.
If Lou thinks bull market will continue, please tell people what benchmark people can use to verify such prediction. Dow 14000 within next 6 months maybe?
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the small investors are being fattened up for the kill
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Your an idiot if you think this is not a secular bull market in a bear market. WE ARE IN A BEAR MARKET. The S&P hit 1500 in 2001 and again 1500 in 2007… but you cant forget about INFLATION. Inflation adjusted the market would of had to hit 1850 points to break the bear.. but it didn’t. ARE WE IN a rally? YES will the rally continue to AT LEAST 1500? YES, but until we hit 2000 points this IS A BEAR MARKET.
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