3 Reasons the Bull Market Will Continue
On March 10, 2009, my column was headlined: "Time to Say Goodbye to the Bear?" Unlike some other market calls I've made, that one turned out to be dead on. The market, as we know now, had hit bottom just one day earlier.
But credit for the piece really belongs to Jim Stack, the Whitefish, Mont.-based publisher of the newsletter InvesTech Research. "We're reaching the point," he said then, "where we really question whether there's much more downside risk."
So where does Stack stand today? Remarkably, three years and a doubling (and some) in U.S. share prices later, he's still bullish, albeit he considers himself a "nervous bull." Stack acknowledges that the advance hasn't felt much like a bull market. That's partly because the major indexes are still far from their peaks.
More importantly, investors have had to endure so much fear, uncertainty and doubt. "Every bull market has to climb an initial wall of worry," says Stack. "But this one has had to climb a perpetual wall of worry."
Current fears include growing chances of an Israeli (and perhaps even a U.S.) attack against Iran, which could send the price of oil soaring, and the possible collapse of the European Union.
But Stack is primarily a market technician. That means he makes his market calls largely by looking at the market itself. His indicators show "an absence of bear-market warning flags." Consequently, he recommends that his subscribers invest 86% of their assets in stocks.
The chief reasons he's bullish:
Few stocks are hitting new 52-week lows, and a lot of them are hitting new 52-week highs. Even when the Dow Jones industrial average plunged 204 points on March 6, only 31 stocks trading on the New York Stock Exchange set new lows.
Academic studies show that most investors are loath to sell losers. So they only dump stocks hitting new lows when they're ready to get out at virtually any price. During bull markets, conversely, investors tend to buy stocks making new highs.
Selling of stocks reaching new lows has been muted, triggering what Stack calls a "selling vacuum." In the past 50 years, there have been 33 of these selling vacuums, and the market was higher 12 months later 88% of the time.
Stack's index of bellwether stocks continues to point higher. These are stocks of economically sensitive companies that tend to sell off ahead of economic weakness. His index includes leading financials, technology stocks and consumer cyclicals.
The ratio of advances to declines is positive. More stocks are going up than going down. In October 2007, on the eve of the bear market, only a handful of stocks were rising even though the major market indexes were hitting new highs. Stack took the divergence as a sell signal.
But Stack doesn't limit himself to technical indicators. The Conference Board's Leading Economic Index is hitting new recovery highs. Consumer confidence and consumer sentiment indicators have recouped all their declines from last summer. Initial claims for unemployment benefits are dropping.
Although Stack thinks the Federal Reserve has done the right things to bolster the economy, he's concerned about the huge amount of debt it has taken on. But as long as Treasury bonds and the dollar remain relatively strong, that's no justification for selling stocks. Says Stack: "It's valid for investors to be worried about deficits and debts. But it shouldn't determine your investment outlook."
Stack's bullish indicators, of course, hardly guarantee that the market will keep rising. Indeed, not all his favorite signals are flashing green.
Two that aren't are the Dow Jones transportation average and the Russell 2000 index, which measures the performance of small-company stocks. In a healthy bull market, these indexes should be hitting new highs along with Standard & Poor's 500-stock index and other major market barometers. For now, though, the transports and the Russell are lagging. "Give those indexes two or three months to hit new highs, or, all other things being equal, we'll be trimming," says Stack.
Looking at the performance of such major indexes as the S&P 500 and the Dow Jones industrial average over the past 12 years, it's easy to get depressed. Fight that feeling, Stack says. After all, long bull markets followed the other two long bear markets of the past century-- one coinciding with the Great Depression of the 1930s and the other encompassing the stagflation of the 1970s. "Don't extrapolate the dismal returns of the last decade into the next decade," Stack says. I couldn't agree more.
No market timer is right all the time. I'm not convinced that anyone can time the market well enough to add value over a buy-and-hold approach. Indeed, in my piece three years ago, Stack cited some reasons why a bull market might not be starting. But he's one of the best timers I've encountered in my years of investing. And he's been right on the money in recent years.
Steve Goldberg (bio) is an investment adviser in the Washington, D.C., area.