Good Morning. The NASDAQ, S&P 500, DJIA and EAFE (Europe, Australia and Far East) indices all enjoyed a strong first quarter of the year. For the NASDAQ, it was the best Q1 since 1991. For the S&P, Dow, and EAFE, the return for the first three months of the year was the best since 1998. And yet, this market remains hated by many and mistrusted by many, many more.
As I've stated previously, I believe the haters of the current joyride to the upside, which for the record, is now entering its fifth month, are unhappy because they've missed the move. More than a few big-name hedge fund managers who continue to maintain a negative macro view, have missed this move and are beginning to hear about it from investors. This explains why, according to Hedge Fund Research, the hedgies are once again behind the curve this year. For example, the primary HFRX Hedge Fund index was up just +3.13% on the year as of 3/31/13 - a far cry from the S&P's gain of +10.03%.
At issue, I believe, is the perception that the sky is going to fall again at any moment. And after that last five years, I guess you can't really blame managers for having a negative predisposition at this point in time. Let's review, shall we? In 2008, stocks fell nearly -35%. Calendar year 2009 started with a decline of -25%. In 2010, the S&P dove -16%. In 2011, the bears danced to the downside to the tune of -19%. And then last year, the S&P corrected by -10%. So, unless you've been in this business for more than five years, you likely believe that big declines are part of the game each year.
However, as I've opined a time or two this year, I'm of the mind that unless another crisis rears its ugly head, we may not see another severe correction (a decline of 10% or more) soon. This also means that in all likelihood, we won't see another bear market in the near term without a crisis either.
Yes, this market has gone too far too fast and as such, I will agree that a sloppy period (aka a consolidation phase) will likely set in. Therefore, I wouldn't be surprised if the second quarter of 2013 pales in comparison to the first. But for those seeing the macro picture as half empty and betting that the market will "come back to them" again in the near future, I'm guessing that they'll wind up being disappointed.
You see, history shows that unless something unexpected occurs, bull markets don't just stop on a dime. No, I've got a handful of indicators that show a slow topping process is more often the case than a sudden dive of -15% to -20%.
Again, I'm not talking about a garden variety correction of 2% - 5%. This type of pullback can and does occur all the time and doesn't need much in the way of a catalyst. However, a bear on the other hand tends to arrive over time. As they say, a market top is a process, not an event.
For example, if you look at the technical health of the 100+ sub-industries in the S&P 500, the number of healthy groups tends to top long before the overall market does. In fact, this indicator tends to top out about a year before a bull market ends. Same thing goes for the number of weekly new highs. This indicator has peaked in front of every bear market since 1966 - by an average of 48 weeks. Yes, weeks.
If you are worried about bond yields rising you first have to recognize that with rates being held artificially low by the Fed for an extended period of time, that the first meaningful move up in rates won't likely kill a bull market. This is due to the idea that the rate increase would be accompanied by an improving economy, which, of course, would be a good thing. But if you look at the trough levels of BAA Corporate Bond Yields, you will find that since 1962, rising bond yields have meant that, on average, stocks had 40 weeks of bullish behavior left before succumbing to the ensuing bear market.
Another interesting leading indicator is demand volume in the stock market. In short, demand volume tends to peak out almost a year and a half on average before a bear market begins. Yet another thing that folks are concerned about is the leadership of the utilities sector. But again, utilities tend to peak out long before the S&P 500 does. And finally, there is the granddaddy of breadth indicators, the advance/decline line. History shows that the DJIA A/D line tends to peak out about 6-months before a bull ends. And since, the A/D line, the number of technically healthy sub-industries, the weekly new-highs, and demand volume all recently hit new highs for this cycle, history would suggest that playing for anything more than a run-of-the-mill correction might not be a great idea right about now.
In case my point isn't clear (I have been in the desert for a week) I'm suggesting that bull market usually don't end suddenly - unless there is some sort of unforeseen calamity. So, as I've been saying, unless there is a new crisis, we probably shouldn't be looking for a big decline right about now.
Turning to This Morning ...
Traders appear to be waiting on the next batch of data before making commitments one way or the other. It is positive that the U.S. futures have not followed Europe lower in the early going. However, this is a situation that could easily change before the open as the bears continue to focus on the divergences developing in the indices. But for now, futures are pointing to a flat-to-modestly-higher open.
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: -0.12%
- Hong Kong: -0.14%
- Japan: +2.99%
- France: -0.51%
- Germany: -0.25%
- Italy: -1.91%
- Spain: -1.47%
- London: -0.47%
Crude Oil Futures: -$0.54 to $96.65
Gold: -$4.10 to $1571.80
Dollar: higher against the yen and euro, lower vs. pound
10-Year Bond Yield: Currently trading at 1.858%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +1.50
- Dow Jones Industrial Average: +2
- NASDAQ Composite: +0.38
Thought For The Day ...
"The foolish and the dead alone never change their opinion." James Russell Lowell
Positions in stocks mentioned: none