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Wall Street’s New Bull Market: 7 Signs the Bear is Dead…
by Louis Basenese, Advisory Panelist
Senior Analyst, The Oxford Club
Wednesday, April 8, 2009: Issue #974
Believe it or not, but based on the classic Wall Street definitions, we’re in a new bull market. As of last Friday, all three major market indices recovered more than 20% from their March 9 lows.
Of course, we’ve been here before. Or as Yogi Berra liked to say, “It’s like déjà vu all over again.”
Recall, back in November of 2008 the markets began an impressive run-up, hitting the 20% milestone, too. Then all hell broke loose.
As a result, not every market observer, myself included, is completely convinced by the recent move. But I will say this – seven notable differences exist between then and now, leading me to believe this very well could be the start of a new bull market.
- There’s hope for housing.
On Tuesday CNBC did a feature story on home sales in foreclosure central – California. In one suburb outside Stockton, where one out of every 67 homeowners received a foreclosure notice last month, new home inventories miraculously plummeted from 130 to just 17. One builder went from four sales in five months to nine sales in one month. Tax incentives definitely played a rule. Nevertheless, the trend jives with the latest overall market data.
Recall, new homes sales jumped an unexpected 4.7% in February. It also lends credence to newsletter guru Dennis Gartman’s latest prognostication that “we’re going to have a shortage of housing in the not too distant future.”
Another positive – lumber prices, a leading indicator for the housing market, rebounded roughly 30% in the last three weeks. (The housing market accounts for two thirds of lumber consumption.) Add it all up, and this data is hardly overwhelming. But it’s certainly less bad (see # 3 below to understand why).
- Takeover rumors are moving stocks again.
In a clear sign of optimism and normalcy, takeover rumors are once again returning to the market. And, more importantly, they’re moving stocks and spurning heavy call options buying. For proof, look at the recent moves in Black & Decker (NYSE: BDK), Textron (NYSE: TXT), Allergan (NYSE: AGN) and Illumina (Nasdaq: ILMN), to name a few.
- From bad to less bad.
Home sales. Durable goods orders. The ISM Manufacturing Index. These are just a handful of the economic data points that have gone from bad to less bad in recent weeks. At the same time, financial companies are beginning to wean themselves off of their government handout dependency.
Five banks announced they returned money given to them under the TARP program. And the TED Spread – a key indicator of perceived credit risk in the economy – is back below 100 basis points (bps) after peaking last October at 464 bps. (Keep in mind, the historical average TED spread is 30 basis points, so there’s still a ways to go.)
- No halitosis.
The November rally that faltered was led by defensive stocks and lacked breadth. In other words, a large portion of the market did not come along for the ride. However, this go-round we’re witnessing widespread strength, particularly in financials, commodity related companies and semiconductors, suggesting the move is sustainable.
- Volatility is dropping.
Right about the time we accepted one-hour 400 point swings as normal, their prevalence dropped off considerably. Look no further than the CBOE Volatility Index (VIX). After peaking at 89.53 last October, it’s back down to more reasonable level around 40. More simply put, the expected market vulatility has been cut in half.
- The market’s always out front.
Countless studies prove the market is the best leading indicator, rallying three to seven months before the economy bottoms. That doesn’t mean we’re immune to head fakes. The classic example comes from the last “severe” recession from 1973 to 1975, when stocks rallied in early 1974, only to stumble again.
But talk about history repeating itself. We experienced the same false rally late last year.
Just like in 1975, when the Dow rallied 36.2% in the three months before the recession finally ended, the recent market move could be the real deal, too.
- Bears out proselytizing bullishness.
In a clear sign of a market bottom, the most bearish investors in recent times found, well, bullishness. This includes Jeremy Grantham, who hated stocks for the past decade; Bill Fleckenstein, who shut down his 13-year-uld bearish fund to go long stocks; Steve Leuthuld, whose Grizzly Short Fund rose 74% in 2008; and Whitney Tilson, another one of the most bearish fund managers in recent years.
Don’t be quick to discard their change of heart and bullish comments as mere bloviations. These guys are the real deal, having predicted the downturn well in advance… and profited from it handsomely.
If this bull market is legit, I’ve already tuld you which small cap companies will perform best here and here.
Turns out they’re already leading the charge, outpacing large caps by a full six percentage points since the March 9 lows, based on the Russell indices.
If you haven’t positioned your portfulio accordingly, take heed. This could be your last chance.
Good investing,
Lou Basenese
Today’s Investment U Crib Sheet
Looking for an innovative company, or one with a significant first mover advantage?
Don’t rely on Wall Street… most of the fast moving companies on the markets today don’t get coverage from them. It’s why finding these companies is so difficult, and profitable. If you’re looking to get into one of these “hot rods” there are four factors Louis Basenese looks for:
- Innovation. Is there product something that has the potential to be big – really big? We’re talking about an innovation with a $1 Billion market opportunity.
- Magnet for Private Capital (Venture Capital or Private Equity). Most companies start out with seed capital so look for really good innovations that have been well funded. When a number of venture capitalists are rushing to pour money in, you can bet that they know it’s potential. And it gives you an inkling on what the market will do to the stock price once they find out about it.
- Get in early on within 5 years of the IPO.
- Make sure the company has a major index listing. The financial requirements a company must go through to get listed vary by index. But the larger the index, the more financial hurdles a company has overcome.
Lou likes to think of his trading philosophy like this, “We’re swinging for the fences but only with small calculated risks.”
So he keeps his allocation and position size small:
- 10% to 20% of total portfulio max into these hot stocks.
- No more than 1% in any single stock.
Lou Basenese’ newest premium service, The White Cap Report, seeks to find companies with exactly the traits above. It’s the reason why the White Cap Index has performed so well this year – it’s up 123%. Find out more, and get all of Lou’s picks.
- Rethinking Foreclosure: Is There a More Sensible Way?
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- Housing Prices: Why Greenspan Is Right About Real Estate Investments
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4 Responses to “Wall Street’s New Bull Market: 7 Signs the Bear is Dead…”
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In addition to being the foremast 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. 
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April 8th, 2009 at 11:00 am
As the economy tries to recover the price of oil will skyrocket and cut it off at the knees. This bull trap has no volume. Where is all this sideline money. Marty Chenard (the smartest analyst in the world) has shown that institutions are tricking this market by bidding up stocks and buying millions of dollars worth of puts. There is no reason for this market to go back to levels that were caused by illegal risk taking by banks and real estate crooks. The institutions will soon bring down the ax and this market will sink like a rock.
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April 8th, 2009 at 11:15 am
Basenese must live in a parallel world but one that is different, one in which delusion replaces reality. Perhaps it makes no difference to him that deleveraging continues, that household wealth is evaporating? Maybe he doesn’t live in the real world where credit card rates are going up and the ability for people to buy with their credit cards (consumer spending) is becoming evermore restricted? What about seriously delinquent housing loans— increasing? Car loans–defaulting? Auto sales in the dumper?
I live in a world where more and more people are losing their jobs and are not able to pay their mortgages, not in a parallel universe where a dead cat bounce means that all is well in the world. This bear market rally doesn’t reflect the underlying rot in our economy. The light you see at the end of the tunnel is a freight train, Mr. Basenese and you sir are standing in the middle of the track. While the market may well go higher in the short term, people that listen to you are going to in for a very rude awakening.
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April 8th, 2009 at 11:42 am
Louis,
Would like for you to be right. However I doubt it as the Fed is in full printing press mode. Trillions of paper dollars backed by nothing assure us the fix is in for higher prices, and a dollar going down in value. I have bet accordingly on my scenario and not Louis’.
Thanks, Lee
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April 11th, 2009 at 9:26 pm
I would have to agree with Louis. In my simple way of seeing the signs of a bull market, is my daily drive to work. For the last month the trucks moving goods has greatly increased. I make the same drive every day, year after year and this has been my way of seeing one part of the picture in the direction of the market.
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