Are We in a New Bull Market Now?

Two weeks ago I posted a video on YouTube declaring that I thought we were in the midst of a new bull market. I went on to say, in order to tell if we have entered a new bull market, it is best to try and determine if we have seen a market bottom. November 20, 2008 was the day the S&P 500 reached 752. As of January 6, 2009 when the S&P 500 reached 934.7, it represented a 24% advance from the November 20th low. Technically, once an advance of 20% or more is underway that is a new bull market. But in an effort to be thorough, I went through five criteria I look at to determine if we were in fact in a new bull market.

Truthfully, I stole the criteria from Benjamin Graham’s The Intelligent Investor. In the book, Chapter 8, “The Investor and Market Fluctuations”, Graham explains how to recognize market tops. He gives five criteria. I simply turned those criteria on their head and replaced one with another I think is more relevant (at least to me). The criteria were:

1. A significantly low price in the market index

From Oct. 9, 2007 through Nov. 20, 2008, the S&P 500 declined 52%, making it the third-worst bear market since the 1929-32 crash which saw a decline of 54%. The only other decline more significant than the ones just mentioned was 89% during the Great Depression. Additionally, the calendar year decline of 39% was only surpassed two other times in (1931 and 1937) in over 180 years. In other words the severity of the decline indicates that we are at a significantly low price.

2. A significantly low P/E on the market

At the 752 level, the S&P 500 was trading at a P/E ratio on trailing operating earnings per share of 11.5x. This is equal to the lowest operating P/E ratio in the 20 years that S&P has been tracking operating results and significantly lower than the average operating P/E ratio of 19.3x since 1988.

Another P/E measure is the Graham P/E (named for Benjamin Graham) which uses an inflation adjusted 10-year average for earnings. For the nine previous bear market bottoms the Graham P/E averaged 14.4x. At the 752 level in the S&P 500 the Graham P/E clocked in at 12.3x. This was lower than even markedly low P/Es.

3. Stock market dividend yields versus long-term bond yields

Dividends paid by Standard & Poor’s 500 Index companies in the 12 months prior to December of 2008 amounted to 3.5% of the benchmark’s closing value yesterday. In early December, the 10-year yield fell as low as 3.4%. Intuitively, stocks should yield more than bonds as they represent the more volatile investment. However since 1958, 10-year notes have yielded on average 3.7% more than stock dividends. The present condition, dividend yields higher than bond yields, serves as an indicator stocks are priced the lowest they have been relative to bonds in 50 years.

4. Level of margin accounts

Margin is commonly used in a speculative manner. When the market is rising, buying stocks with borrowed money can and does juice returns. But in a declining market, they can be a death certificate. Margin accounts declined 47% from July of 2007 to November of 2008.

5. High volatility in the market

The best measure of volatility we have today is the CBOE VIX. The VIX, is also called the fear index. When it is high, it indicates there is a plethora of panic selling in the market driving prices down. Market prices and the level of the VIX move in opposite directions. Historically, a VIX above 20-25 meant there was a lot of selling. Since the high of October 2007 to date, the VIX has averaged almost 32 and even reached an intraday high approaching 90. Warren Buffett himself even indicated he had never sell panic like this in all his years of investing. Panic selling usually means market bottoms.

Although we have seen the market pull back from the 934 price it reached on January 6, it has not dipped below 800 since then. If history is any indicator, we are in the first few days of a new bull market.

Disclosure: I and the client of Brick Financial Management, LLC own shares of iShares S&P 500 Index ETF but positions can change at anytime.

Comments

[Archman Inv...:]

Spoken like a true asset gatherer.

S & P 500, 25 year trend line puts the index at 750 as of today.

The farther is goes above that, the farther it has to fall once it reverts to that mean.

Traders who understand that, will keep making money in the years to come. Mom and Pop investors who who listen to asset gathering managers, will eventually get into the market, as always, at much higher levels, only to once again, lose a bundle.

If only we could just go to 750, and then have the index return 10% (div's included) for the next 2 decades, instead of the usual up 20%, down 8%, up 12%, down 40%., thanks to the hedge funds and Fed, manipulating the markets.

Wouldn't that be nice??

Jan 29 06:48 AM

[Jim Hawthorne:]

Are we in a bull market now? No, we most assuredly are not! Bull markets are characterized by higher lows and higher highs, rising investor confidence, increased money flow, rising moving averages, etc., etc., NOT by high hopes and wishful thinking, which by the way are usually in great supply close to the END of bull markets runs rather than at their beginning!

Have we hit THE bottom yet? Who knows? You have made the serious error of regarding a market bottom as a singular event rather than a basing process over time. One thing is for sure; attempting to call bottoms and basing your investment decisions on that call is the most foolish and dangerous strategy around. Believe me, every one of us has tried it sometime or another!

As of the latest reports and estimates, the PE of the S&P500 is indeed somewhere around 11.5 but, we see no clear indications of higher earnings coming at us! In fact, estimated EPS of the S&P500 continues to decline with falling sales. What is the market telling you?

Pull up a daily chart of the S&P500 from July 2002 through March 2003 and you'll very quickly see how well the bottom callers of July and October did back then!

Perhaps we are getting close to the end. Perhaps we are finally close to the beginning of the end. Perhaps we still have farther to fall. In any case, it is far easier to make up for lost opportunities at this game than it is to make up for lost CA$H!!!

Jan 29 07:01 AM

[know nothing:]

The unemployment market is having a BULL run, I see. It is a shame that all good things must come to an end. The only BULL market around here is what the gov't run media keeps feeding the U.S Citizens, now thats a bunch of BULL - - - -

Jan 29 09:23 AM

[waldipup:]

Since the market "leads" in a turnaround , the concept of a new bull market assumes that general economic conditions are going to turn back up.

The bailout , though ultimately a certain disaster , may temporarily create conditions to bouy up the economy ,

Making technical buying at lows potentially profitable during an artificially created government upswing.

But if so , be wary for the downside once this artificial prop has run its course.

Jan 29 09:56 AM

[mrresponsible:]

I commend you in having the strength to write this article as it might respect the fact that markets are also influenced by the psychological mood of investors around the world -- not only technical indicators. There are natural and yet-unexplained cycles in the world and one of many good books is The Mystery of 2012, Predictions, Prophecies and Possibilites.
At some point, a natural response will be that we will begin getting tired of all the negatives and I think I am beginning to see people moving beyond shock and denial and moving on to accepting which is the natural response for healing the markets to become more positive - a leading indicator. I think you are not early in writing this article if you feel it might be an indication of a beginning to the end.
Here is a summary of many writers that I am working on and I will include some of Graham's work: Thanks,
STOCK MARKET DECLINES, RECESSIONS, RECOVERIES & CHARACTERISTICS
Stock Market Declines
The U.S. stock market peak in this cycle could be defined as October 2007
On average, the U.S. stock market peak to trough is 10-22 months in length. (On average, with the current official declared recession beginning December 2007, the recession trough would likely be before September, 2009. On average, markets should bottom between April & Sept., 2009
U.S. stock market bottoming process: has been 3-8 months in length since 1970. April to October, 2009.
The total time spent in bear markets has been 31% of the last 107 years.
Since 1953 the S&P stock market index bottomed 4.1 months prior to recession trough.
Recessions
Official Current Recession Declared by National Bureau of Economic Research: Beginning December 2007
Historically, the length of recessions have been:
17 months in length since 1854
14.4 months since 1902 - Average stock market decline -24.2%
22 months since 1929
10.2 months since 1945 - Average stock market decline 34%
During a couple of bear stock markets, no recessions were ever declared.
Stock Market Recoveries
Stocks and sectors provide some leadership - solid sales and earning growth and the stocks are traded well
U.S. stock Bull markets (from trough/bottom to stock market peak) have averaged 30 months in length since 1900
There have been three long bull markets that lasted 9 years, 10 years, and 15 years 8 months
An average gain of 106% for all bull cycles
An average gain of 46% after one year from the recession trough. If it is a time when all others are fearful, maybe it is time to buy.
Broadening markets (small, mid, and large cap stocks going higher)
Margin debt as a percentage of GDP reaching the historic low range that corresponds to bottoms.
Insiders buying.
The VIX Volatility Index falling
Sequential Characteristics of Declines, Bottoms, and Recoveries
Concern - Decline of market over long period of time
Fear - Rapid acceleration in the speed of the market fall
Panic - Massive increases in volume and volatility - like convulsive seizures
when 14 of the 64 days where intraday volatility is 8%+ ... going back to 1928.
So out of 80 years, over 20% of the most volatile days have come since October 2008
Shake-out - speculators - everyone gives up - no one is saying it is a great time to buy
Capitulation - You won't know it when you see it.
The idea of capitulation could be costly as investors wait for a bus that never arrives -
best if you are a long term investor 5-10 years
Geniuses are gone
NBER declares recession is here
"Acceptance" stage of grief
Oversold conditions
Market does not go down on bad news: Trust Building/Hope
Stock market volumes are low after a bottom.
Recovery
Average 1 year return after trough/bottom = 46%
Bounces off the bottom can be dramatic.
1973-75: Stocks up 80% within a year.
1982: Stocks up 65% within two years.
1990: Stocks up 60% in next three years; up 200% by 1998.
2002: Dow up in 2003.

Jan 29 10:19 AM

[kelm:]

Investor's need to get beyond the Wall Street-centric focus they have had and look to overseas markets, credit markets, commodities, and currencies for confirmation. So many claim this crisis was a surprise to them because they looked only at US stocks.

Jan 29 10:27 AM

[Alphameister:]

The idea that any advance of 20% or more by a major stock index constitutes a new bull market is just one of the absurdities routinely floated as investment dogma. Is it possible that the rally off the November lows represents the start of a new bull market? Yes, but it was just as possible when the rally was 15% instead of 24%, and just as improbable as many would believe today. A 20% advance that turns the 200-day average upward is vastly different from a quick 20% run in the context of the market disaster of the past year. The 20% number is totally meaningless.

Jan 29 11:10 AM

[OldLimey:]

Are we now in a long-term bull market? Not a cat's chance in hell. The charts and the fundamentals scream 'bear'.

Are we experiencing a counter-trend rally? Yes.

Why? Three reasons: first, it's blindingly obvious that the government is timing the release of newsflow to support the indices at critical points, and they're finding a receptive audience because - yes - a lot of people are getting immunised against negative newsflow; second, the asset managers need to tempt money back into the markets and so are happy to spin the unknowable into something positive; third, trading desks are happy to ride a strong rally and then short the pants off it.

How far will it go? No idea. If it breaks 910-920 then 1000 is probably doable - although not for the feint-hearted without a hedge.

Will we test the November lows? Nothing's certain, but the probability looks high.

Will they hold? No idea. A case can be made that they will not, but charts are always in the eye of the beholder.

At the moment, hope is overwhelming facts. The longer this lasts, the harder we'll come back down to earth. (And please - if you disagree then hit the thumbs-down, but no comments with that old claptrap about the markets seeing 3-6 months ahead.)

Jan 29 11:36 AM

[secmaven:]

All companies that will have higher earnings in 2009 than 2008 line up in the bull market lane and CHARGE!

Jan 29 12:41 PM

[Conan the B...:]

All companies that will have higher earnings in 2010 than 2009 line up...

Should be a lot of them, those that survive, at least. So pick and chose those companies which will not be dependant on handouts. Survival of the fittest.

A new twist, there is talk that Capital requirements for the Insurance Industry are going to be lowered. Good for some insurers, not All.

Jan 29 02:35 PM

[carey_jim:]

The reality is that we are in a new bull hit universe which means the bulls have been hit by a bus and some think they've gone to heaven.

Jan 29 03:31 PM

[Erick Tippett:]

Mr. Taylor,

Any particular reason you're using the S & P 500 as a model and basis for a 'bull market' projection without considering the DJIA as a confirma-
tion/non-confirmation factor, or any of the other idices for that matter?

When it comes to 'stealing' Mr. Graham's theories on bull market indica-
tors, try swiping some of Ralph Nelson Elliott's Wave Theory material.
If you do a thorough enough reading of these writings, you'll see that
your projected 'bull market' is nothing more than a countertrend at best
and a lethal 'bear trap' at worst!

Have fun studying!

E. Tippett
Chicago, Illinois

Jan 29 11:52 PM

[Conan the B...:]

Erick: I'm figuring on a very playable Dow move to12,000 within 2 to 3 years. After that Bob Prechter's 1987 call.

3 more quarters of backing and filling before it would start though.

Indian Head Park, Ill

Any thoughts on gold?

Jan 30 01:21 AM

[rber:]

Yes! And the financials will lead the charge..... over the cliff!

Jan 30 06:33 AM

[morph366:]

Bull/bear - isn't it all a bit too simplistic?
We seem to be in a range bound market for the time being

Jan 30 07:42 AM

[Paul Price:]

Instead of trying to call the market trend why not just buy great low/no debt companies that are cheap enough to provide great earnings yields right now in this shit economic environment?

When things eventually get better these companies will post much higher EPS and command bigger multiples also.

With stocks trading @ an 8 P/E now you get 'owner earnings' of 12.5% /year after tax and you can afford to wait for the investment mood to change.

Many great companies that are definite survivors are trading with single digit multiples now. Buy a nice diversified portfolio of those type stocks and put them away for 1 - 4 years instead of trading your ass off trying to catch 5 -10%

Jan 30 08:29 AM

[Conan the B...:]

Paul Price: Always interested at looking for the types of companies you are Talking about, got any symbols?

Jan 30 10:09 AM

[gordon:]

previous recessions had p/e 7-8. The government, aka Plunge Protection, is coming in each time we head to/below S&P 800, don't think they aren't. If this is the only manipulation on the upside, since money flows show OUTFLOWS from equities, don't bet the farm on it holding. Below 800, support is 741, below that the target is 660. They (the primary investment bank broker-dealers) windowdressed the end of month starting late Tuesday, painting the tape all Wed, spiking it as the sheeple retail suckers piled into the stocks like IBM, MMM, all the liquid ones they were marking up, only to see them SOLD TO YOU yesterday.
All a casino con-game. They will try to hold $SPX 800 until some new 1st of the month money comes into 401Ks next week, as the sucker-wageearners are still blindly contributing thinking they are averaging down.
S&P below 10years ago. In Japan, the market is where it was 20 years ago.

Jan 30 12:37 PM

[John Lounsbury:]

Benjamin Taylor - - -

You wrote: " the 1929-32 crash which saw a decline of 54%. The only other decline more significant than the ones just mentioned was 89% during the Great Depression" This is not quite correct. The Dow fell 89% from 9/3/1929 to 7/8/1932.

You are very brave to go out on such a long, thin limb. Imagine the glory if your predictions are correct. Or ....

It is not very prudent to pin so much on the trailing twelve month earnings when it appears that earnings have come down more than 50% from there. This is a much steeper decline than what we have become used to in recent decades. If we use current earnings, the PE for the S&P 500 is somewhere around 20 +/- 2.

How great if your predictions come to pass. I fear for something different.

Jin Hawthorne - - -

Very good discussion. Every bottom caller should read your comment and then add caveats to their predictions.

mrresponsible - - -

Very nice summary of historical averages, but, do you really think the current situation is average?

OldLimey - - -

You have written another lucid comment. I especially liked your implication that stretching the decline ("easing" the decline) ultimately makes the fall go further.

Paul Price - - -

You make a good point, but I have trouble with visibility for future earnings. I do not want to buy a P/E of 8 and find two months later that earnings have fallen and I really bought a P/E of 16 or 20 or higher. These are tougher times than usual to do value analysis.

Jan 30 12:54 PM

[Conan the B...:]

John: I was hoping for a few symbols from Paul P. but you seem to have shut him down.

Would you happen to know of any website or service which provides charts of companies with long basing patterns, specifically, not just by accident?

I would have taken Paul's symbols, punched them in at BigCharts.com and glanced at them before deciding if any were worth doing DD on.

So, by any chance, are you tracking anything for potential purchase?

Jan 30 04:59 PM

[John Lounsbury:]

paultaut - - -

I am hunkered down, about 10% invested. I keep trying to do valuation research and I'm getting blown out of the water with balance sheet uncertainties and lack of visibility to future earnings. I have nothing I want to buy right now, say nothing of recommending.

I do an occasional multi-day trade in levergaged ETFs, but I don't dare to try to do anything related to trend following. So momentum investing, which I like to do a little of, is off the menu too.

I'd like to short treasuries, but the risk is too high that we may have a flight to sefety in the coming weeks with another strong move down.

Paul, I'm sorry. I don't have anything to discuss right now. Having said that, watch an explosive move over 10,000 on the Dow start next week. It could happen at any time. 6,400 or 10,000 - take your pick. I can't deal with that uncertainty.

Jan 30 11:50 PM

[Conan the B...:]

John: there is only one stock which merits some attention, at least for me, that might interest you.

Alon energy-ALJ- on nyse. a year long base, trending higher. Comprised of mostly heavy/sour refineries. better crack spreads.

Includes gas stations/convenience stores in texas. After the XOM refinery release, I believe they may surprise to the upside on a nearby basis. They supply some 800 stations.

However, I haven't been buying ALJ because of the above. I've been accumulating shares because they are big in the future infrastructure build area. They are a leading producer of asphalt.

They are Isreali owned but all operation and manufacturing is internal to the USA.

DD your own, my other baby is TNK, but I would rather it dropped some.

Jan 31 03:49 AM

[rodgerreno:]

being a end user of many products and services,none of which i have cancelled,nor stopped using,i'm going to say that everything is normal.traffic stil sucks,i still have to wait in line at the grocery store.the high gas prices cut into my entertainment money.the worst problem is that my 401k is much lower.i can't buy stocks with confidense because all the smart people can't decide what value is.someone or some country must be making money if we are losing money.where did the money go?is the fed deposit a real number or an estimation?if the dollar apreciates,does the deposit go lower??

Jan 31 05:54 PM

[Conan the B...:]

Rodgerenno: A lot of products have built in costs from 6, 9, 12 months ago.

Think in terms of a season's pass to your favorite home team. You pay upfront. It doesn't matter how poorly ticket sales run later in the season. You have already spent the money. You can't get your money back.

The same thing holds true for most importers, they made their commitments. Now they are getting hit for those commitments. Inventories are piling up, sales are down and discounts are offered every weekend.

They have to sell to raise money for the next season, for some there won't be a next season.

Feb 01 03:45 AM

[Moon Kil Woong:]

Reading this makes my stomach churn. Yah maybe we are in a new bull market but not the type of bull that goes up (more the type of bull... that stinks to high heaven). A market full of self serving cheerleaders arguing the same dry points does investors no good.

Earnings ar going down so you can't be past PE oriented. There is not panick selling. If there was you'd see high volume not low volume. And an argument that the worse things get means everything must get better is a rather ridiculous one. Especially since you could use that same argument a year ago. LOL withwhat it got you then and may duplicate this year.

Also you are right VIX went down which you are implying should have been a big positive. So why is there no bounce like you would think? Because the market is not panicking. It is just responding to de-leveraging and lower liquidity. If the author expects margin to go back up to the same levels as before he'll be waiting for years not months.

These arguments are guff.

Feb 01 05:28 AM