If It Looks Like a Bull, Walks Like a Bull, Acts Like a Bull…

In 2009, the basic rationale for driving stock prices higher leans heavily on the 'less bad' perception of future economic activity. The markets, as evidenced by credit spreads, commodity prices, and stock prices, have been able to move away from “the end of the world as we know it” mode. An unprecedented amount of economic stimulus and newly printed money has helped shift the primary fear from one of deflation to a possible loss of purchasing power caused by deflation. The market’s perception seems to be “if things get worse economically, and they may, the policymakers’ response will be more stimulus and more printed money”. This perception coupled with the “less bad” outlook has increased the demand for inflation-friendly and weak-dollar assets (oil, gasoline, copper, emerging market stocks, foreign bonds, commodity-related currencies, etc.).

Since humans have been greedy and fearful since the beginning of time, they tend to act in similar ways before, during, and after a financial crisis. These tendencies manifested themselves during the tulip bulb craze of the 1600s, the dot-com craze of the 1990s, and the real estate mania of the 2000s.

The table shown below allows you to visualize the transition that has taken place between March and June of 2009. In March (far left side of the table), most markets had the characteristics of a bear market. Currently (right side of table), numerous markets look much more like an early bull market than an on-going bear market. Below, we will use the S&P 500 (2000-2004) to illustrate and expand on the concepts as they relate to the current day and the information presented in the table below. Click on tables and charts for larger images.

By studying past bull and bear market cycles, we can better understand what to look for during a possible transition from a bear market, dominated by fear, to a bull market which eventually becomes dominated by greed. If we are not aware of the twin thieves, greed and fear, they will rob us and hamper our ability to grow our accounts. As we have stated in the past, in a bull market:

• Price tends to stay above the 200-day moving average (MA) (red line).
• The 50-day moving average (blue line) tends to stay above the 200-day moving average.

In bear markets, professionals tend to buy at extreme points of pessimism looking for a profitable trade. Traders often ride a market back to its 50-day or 200-day moving average and then take profits. In a bear market, traders tend to sell at the 50-day or 200-day because their fear of losses remains greater than their confidence the market can move higher. Their lack of confidence speaks to their pessimistic view of future economic activity. Bear market rallies are mainly fueled by traders and lack participation from longer-term investors.

In a bear market (see above), where conviction is lacking to push prices higher:

• Price (black line) tends to stay below the 200-day moving average.
• The 50-day moving average tends to stay below the 200-day moving average.

At some point in a bear market, the perception of traders and investors slowly starts to shift toward the acceptance of better times ahead (or "less bad" times). When their confidence, and more importantly their conviction, becomes strong enough, instead of selling at the 50-day or 200-day moving average during a rally, they hold thinking the markets may be able to move higher. If enough investors and traders share the same improved outlook, a market is finally able to clear previously insurmountable hurdles in the form of the 50-day or 200-day moving average.

Emerging Markets Have Led The Way Higher

Since the S&P 500 is a laggard in the current market, we will use the Emerging Markets Index to illustrate how numerous leading markets, asset classes, and sectors look in June of 2009. If you compare the chart of the Emerging Markets Index below to the This is What A Transition From A Bear To Bull Looks Like chart above, and do it with an open mind, you will be hard-pressed to come away with a bearish interpretation.

Part Of The Pattern: Not Accepting The Possibility Of A New Bull

The fact few are willing to call the current rally anything more than a bear market rally fits well with the historical profile of new bull markets. No one, including us at CCM, can definitively say a new bull market has or has not started – only time and future market action will tell. However, we can confidently state that what has transpired since the March 2009 lows compares very favorably with the end of a bear market and the beginning of a new bull market. How long a new bull might last is also something that can only be definitively answered in retrospect. While market conditions have improved, risk management must remain a significant part of any investor’s game plan. Even bull markets can experience significant corrections.

Disclosure: The author and CCM clients hold numerous postions including TBT, exposure to emerging market stocks, foreign currencies, commodities, and foreign bonds.

The charts and comments are for informational purposes only.

Comments

[redbaron:]

You have said it much better, and had much better data, than what I have been posting here on SA. I can't wait to see to see how all the doomsdayers jump all over you, like they jump all over me when I postulate such thoughts. And while the debate goes on, the market climbs that wall of worry.

Jun 12 08:00 AM

[mrxg4:]

"An unprecedented amount of economic stimulus and newly printed money has helped shift the primary fear from one of deflation to a possible loss of purchasing power caused by deflation."

Last one should be inflation...

Jun 12 08:15 AM

[Aaron Ashcraft:]

Thanks for the informative analysis.

It has been interesting that many respected analysts have called for a "W" shaped market, rather than a "V" market. One respected analyst has repeatedly forecast that the overhead resistance at S&P 950 is the "high water mark" before sliding back down to retest the March lows.

None of us know what will happen in coming months, but recent market activity and repeated attempts to shoot past S&P 950 makes it look like S&P 1100 is much more likely before any major correction. S&P 1100 or more would be consistent with your analysis.

Jun 12 08:23 AM

[Chris Ciovacco:]

mrxg4 is correct should read:

"An unprecedented amount of economic stimulus and newly printed money has helped shift the primary fear from one of deflation to a possible loss of purchasing power caused by inflation."

Appreciate the catch...

Jun 12 09:00 AM

[Dave Wrixon:]

If it looks like a bull, walks like a bull, acts like a bull....

Then it probably is Bull!

Jun 12 09:42 AM

[Dave Wrixon:]

No, but what we do know is that the one off fudge of the banking accounts due to the removal of mark to market cannot be repeated. Nice Get Out of Jail Free Card, but I am afraid they only get to use it once. Even then the smoke and mirrors will come back to haunt them. You can pump the markets all you want but unless the real economy recovers to 2007 levels then the toxic assets are still toxic.


On Jun 12 08:23 AM Aaron Ashcraft wrote:

> Thanks for the informative analysis.
>
> It has been interesting that many respected analysts have called
> for a "W" shaped market, rather than a "V" market. One respected
> analyst has repeatedly forecast that the overhead resistance at S&P
> 950 is the "high water mark" before sliding back down to retest the
> March lows.
>
> None of us know what will happen in coming months, but recent market
> activity and repeated attempts to shoot past S&P 950 makes it
> look like S&P 1100 is much more likely before any major correction.
> S&P 1100 or more would be consistent with your analysis.

Jun 12 09:45 AM

[Tomcat101:]

Most of the financial experts and politicians were saying the same thing in 1930 too... I guess that really looked like a bull to them.

Jun 12 09:45 AM

[Wizler:]

this is a relatively short analysis window reflecting a time of ever increasing debt.....with consumer deleveraging, inflation showing up at the pumps and the US gov reaching the limit on spending, keep your eyes open.

Jun 12 10:54 AM

[Larry House:]

What we have here is a lot of bull but not a bull market. Do you really believe a bull market can be spawned by government spending? The government's trillions are priming the pump, but we don't know if the pump can yet draw water. Keep in mind, deep recession, long recovery. Our problems are of such magnitude that a quick bounce off a low point is hardly proof of a new bull market. I hope, but I don't believe.

Jun 12 10:59 AM

[RiskReturnO...:]

As long as the leadership sectors and countries continue to gain in price and volume, the overall market will be OK.

For US, look for QQQQ and XLE to provide leadership.

For global markets, look for FXI to confirm continued bull market.

Currency trades are great in this environment, particularly DBV (G10 Carry trade) to benefit from strong Aussie $ and short Yen.

Commodities that could confirm bull market include: DBA, DBB, and DBC. Best trade could be DBA as the other two have had very large run-up already.

Jun 12 01:56 PM

[Egg:]

It's not a bull market.

It's a cash is trash market and you have to do something with your money since everyone knows Bernanke, et al are eventually going to gut the dollar.

Jun 12 05:37 PM

[Fighting Yoda:]

It is all luck, here is a story on good luck and bad luck:

Missed Air France Flight, Only to Die in Car Crash
A woman who dodged death when she and her husband narrowly missed Air France Flight 447 before it plunged into the Atlantic Ocean, killing all 228 aboard, was killed in a car accident just over a week later.

Jun 12 05:39 PM

[untrusting ...:]

Only one problem with this authors' data. The chart would look nothing like it does, except for the MASSIVE manipulation of the market by Goldman Sachs, JPM, the other TARP banks and with winking approval of the Fed and Treasury. It is patently obvious as is pointed out by Tyler Durnan, in many posts, showing the incredible upward spikes (stick saves) within the last 1/2 hour of the market on many occassions. Even today you see a downtrending market until the noticable and sudden "intervention" late in the day( take a guess as to who has the money to do that). Again, the TARP banks have the motive, means/massive Fed money, and trading operations to do this. Further the TARP banks made the vast majority of their reported profits from trading in Q1 and obviously they are attemtping to do it again in Q2. When you add to that the obvious manipulation of oil prices higher, despite absolutely terrible fundamentals.... again that would change the charts above in a major way. Goldman Sachs & JPM are known to have purchased over 100 million barrels of oil back at the lows ($35/barrel) in Dec/Jan and stored them offshore in tankers. Of course Goldman did that when they were forecasting oil to go to $20/barrel. Of course again Goldman has now recently changed their forecast to $85/barrel ( I wonder why when in fact oil fundamentals are even worse than they were before...it wouldn't have anything to do with being able to rip off Americans for $3-4 billion in trading profits now would it?) Even the oil companies acknowledge that oil prices are at these levels for no valid reason and that fundamentals simply don't support this manipulated oil price. Certainly no professional oil expert such as Schork or WTG Economics believes that the rapid rise in oil prices is in any way supported by oil fundamentals.

So in short, the market has tried to correct downwards ( as it should based on virtual any fundamental criterion), yet it has been prevented from doing so on numerous occasions by manipulation/intervent... Had such manipulation/intervention not occurred, then the stock charts would look entirely different than they do.

If you think that the TARP banks and the Fed and Treasury can continue this charade indefinitely you are simply wrong. There are just far far too many people that are aware of this..... and that is one reason why the volume is so low in this artifical bear market rally. When you combine the obvious manipulation/intervention in the market with the absolutely terrible stock fundamentals and economic fundamentals, then many many smart investors are simply declining to play the rigged game or at best trade it as they know this is NO REAL BULL MARKET.

But if Goldman, JPM, and the TARP banks decide to take the opposite course and start shorting the market (after they have made enough billions pushing it up), then you had better look out below, because this market will go down even faster than it did before. If you are willing to take that chance, be my guest, but many of us are not.



On Jun 12 08:00 AM redbaron wrote:

> You have said it much better, and had much better data, than what
> I have been posting here on SA. I can't wait to see to see how all
> the doomsdayers jump all over you, like they jump all over me when
> I postulate such thoughts. And while the debate goes on, the market
> climbs that wall of worry.

Jun 12 05:46 PM

[Robespierre:]

I'm so amaze how a bunch of charts make forecasting look like a science. So here you have this author comments on Sep. 2007:

While a Fed rate cut is one of many factors that will influence stocks over the next 12 months, it is one of the most important in the eyes of Wall Street. In very simple terms, based on these four historical cases, which are similar to today’s environment, there is a 75% chance stocks will be higher a year from September 18, 2007. This does not call for blind optimism, but it does call for controlled optimism.

seekingalpha.com/artic...

Now I'm not trying to berate the author. Every one know how difficult it is to predict the market. All I'm saying is do your own DD before blindly follow the experts...


On Jun 12 08:00 AM redbaron wrote:

> You have said it much better, and had much better data, than what
> I have been posting here on SA. I can't wait to see to see how all
> the doomsdayers jump all over you, like they jump all over me when
> I postulate such thoughts. And while the debate goes on, the market
> climbs that wall of worry.

Jun 13 08:35 AM

[Archman Inv...:]

Where do we start with this one?
Well, first of all the author owns and runs a money management firm.

Gee I wonder if it is in his best interest to be bearish on the markets considering he is long certain markets? I think not. I am not attempting to be critical and I do not want that author to be offended, however he is an "asset gatherer" and they rely on asset gathering and the fees generated from such practices. Bull markets tend to me more kind to asset gathers than bear markets so you see very few asset gathers promoting bear markets.

Secondly his charts on the S & P are taken in small snap shot times frames which do not illustrate the real overall market trends of those time eras.
The 1995-2000 timeframe he illustrates was the final 5 year explosion of easy Fed money within a 20 year secular bull market that started in 1982.
If you look at this chart from an article I wrote a few weeks ago:

static.seekingalpha.co...

You can easily see the "melt up" final phase of the 1982-2000 bull market. This is the time frame the author displays in his chart.
That was not "what a bull market looks like" as the author stated but what a bubble looks like. The authors chart allowed for the flattening out of the time frame but when showed from a true 25 year perspective it is very easy to see the bubble.

Secondly, while the authors 2000-2003 bear market is correct, upon review of the chart I attached, it is quite clear that the bubble number 2 was inflated after 9/11 and though we had a big bear market rally from 2003-2007, thats all it was: a bear market rally fueled by easy money, housing ATM, etc.

So the crash occurred and the S & P got back to its continuation trend line- which I do think was a good thing!!

However now, are we really in a "new" bull market???

To me, a bull market is defined by stock prices reflecting the "true" and "real" and "sustainable" underlying fundamentals, nothing of which I have yet to see from any of the data that has come out.

That is not to say the market cannot anticipate the future, however I think the market has anticipated quite a bit, plus investment banks using TARP money, hedge funds driving the market higher simply because they want it to go higher, certainly has not hurt either.

I have enjoyed this market uptrend (lets not call it bear market rally or new bull market for now- lets just leave it in generic terms) however I remain skeptical of it all.

People do have a few choices. Most americans however follow the carnival barkers on TV and typically get their heads handed to them. Or they can be smart and do like I do. Never be to bullish, never be to bearish, for being one or the other, will certainly send you to the poor house unless you have perfect timing.

Jun 13 08:38 AM

[fatcat:]

Say it ain't so,Chris.....the last bear has died.

If you are a contrarian,this may be your signal...

Jun 13 09:09 AM

[Old Trader:]

Another point that argues against this being a "true" bull market has been the lackluster volume. There's a truism that moves in either direction are less meaningful if there's light volume, as it takes less buying/selling to make the market "move".

Jun 13 09:13 AM

[YoYoMama:]

Taking the historical perspective, we are in a secular bear market which will likely last another 5, 6, 7 or more years. So, no, this is not the beginning of a secular bull market that will last another 20 years or so.

I agree with Archman Investor, in that it doesn't matter what you call this - bear market rally or bull market. For right now, the market is up and showing resilience. It pays to take the ride...while it lasts.

The caveat of this bull is the historical perspective. Boom and bust. We're still in that "bust" of a secular bear, so it may be hard going for a while, even with this most enjoyable rally.

Jun 13 09:38 AM

[conceptwizard:]

If you look at the extended chart on your S&P 500 from 2000-2003 and extend it out to March 2000-2009 you will find that we are, have been and will be in a bear market for awhile.
If you are ging to make a case please use the Complete charting information. as this changes the end result.

Jun 13 09:49 AM

[Archman Inv...:]

Conceptwizard:
Agreed. I attempted to show this in my post, with the accompanying chart I provided.
As per my post and my chart from that post I see the market in a very big ascending triangle pattern. Now that sort of pattern is typical bullish and reflects a long term uptrend line on the bottom and a series of tops along the way, until (hopefully) it is resolved to the upside.
I had at one point extrapolated out into the 2000's where the meeting point on the chart was.
You know what year it gets resolved? Somewhere after the year 2030. Look I have no idea what happens. But it would be interesting and prove my thesis if over the next 20 years, stocks tested but never got above 1400 on the S & P and then always fell back to its long term trend line. That would confirm to me that we are in this ascending triangle and it will not be resolved for another 20 years. Fun food for thought.

Jun 13 10:05 AM

[vicelord:]

You need to start reading Zero Hedge. This ain't no bull market, my friend. There ain't even a name for what this is. This is the FED, JPM, GS, STT, and MS and who knows who else all acting in concert to artificially prop up both the broader indexes and the bond market, being pointed out in real time by Zero Hedge (the guy should be given a pulitzer for his work.)

And I'm cool with that, I'll go along for the ride. But, as Tyler Durden said, "Anyone who thinks that 50 years of over leveraging and easy credit can be undone less than 1 year after the LEH BK is either delusional or demented, or both."

Jun 13 11:18 AM

[Alphameister:]

If the consensus here is that the 2003 to 2007 market advance was just one big bear-market rally, I'll take another one please! I don't really expect anything comparable in the US, which is why I've been investing mostly in China, but I'm amazed that the author's very elementary and widely accepted ideas of how to define a bull market versus a bear market have generated such intense opposition. YoYoMama is right on target: cyclical bull market within a secular bear.

Jun 13 12:21 PM

[Swashbuckler:]

Enjoyed the article, but I believe that at this point in time, the charts are largely moot. Primarily due to the reasons cited in vicelord's post.

Jun 13 12:34 PM

[nobby73:]

I have seen no hard evidence to suggest that the real world economy, that exists beyond electronic trading systems, is improving. I hear things like, the decline is slowing, expectations are improving, job losses are stabilizing. None of this means improvement. With individuals saving more and consuming less, I don't see corporate earnings rising to match the current prices, but perhaps in the future, this will not matter...

Jun 13 12:51 PM

[vicelord:]

The question remains, though - how far are they willing to take this? At what point does a completely unreasonable forward looking P/E for the S&P become exactly that; completely unreasonable?

This whole "rally" is so far predicated on some fantasy that the banks can "earn their way out of this," or that the consumer is on its way to maxing out their credit cards again to buy iphones and cars and sham-wows and what have you, with oil marching back upwards and mortgage rates climbing,... while California on the brink of insolvency and unemployment where it is?

Whatever you say, dude.

And if you like to look at charts, maybe take a look at the $BIX... 'cause that one tells a completely different story.

Jun 13 01:03 PM

[basehitz:]

Since we're gonna use famous quotes, here's another . . . keep it simple.

ftalphaville.ft.com/bl...

We've only been in this predicament once. All the forecasts based on charts in the last 50 years had one critical factor missing. . . DEBT. Paper printing prosperity may reinflate asset prices temporarily, but we have a more recent history of how that worked out. Just ask "Easy Al".

Jun 13 03:43 PM

[notsosmart:]

most on this site have an agenda.wether its financial or real estate all you will get from them is a lot of bull.beware-lots of resets on the horizon & the phony rated AAA worthless paper has not magically vanished.the ponzi/casino called wall st is still operating.the dumb sheeples have only lost 1.3 trillion in value but the fleecing continues.visited the new citi corp. stadium you own?LOL

Jun 13 04:35 PM

[George Simone:]

He's the best!
Period!!

Jun 13 04:57 PM

[vicelord:]

I got one last thing to say on the subject - $592 trillion (that's TRILLION, folks) in unregulated derivatives are still lurking around out there in the shadows like something out of a horror movie, waiting to strike.

Bull market my ass.

Jun 13 07:00 PM

[The-Stock-M...:]

Nice analysis. But methinks:

"If It Looks Like a Bull, Walks Like a Bull, Acts Like a Bull…"

... It's very likely that you have already missed the boat!
By the time all indicators turn green as in the picture you've shown, it's almost time for them to turn back into red.

Not trying to be a permabear, but agree that any investor with the heart of a bull should tread with very tight stops.

Jun 13 08:37 PM

[JR Ewing:]

What I see according to the charts from the author and the comments is that either way the market is getting to roll over. In order for it to be a Bull Market we need a higher low (drop to 800?). In order for it to be a Bear Market rally we need to retest the low of 666 and fail. So that tells me that with the lower volume and the resistance here, and the lack of fundamentals changing and oil topping the market is looking for a trigger to roll over.

But I think until we get that committed roll over you have to play both sides and even thought the open and close don't show it there is a lot of action during the day.

So either way we are due for a correction. I like the option play here with the Vix lower the SDS for June and July is cheap. I have been trading the June 49's and taking a dollar a day in just market fluxuations between open and close. Wait a 15 minutes for the futures to be absorbed then go short SP make a dollar take a dollar and make a dollar, more if you stagger them at higher levels you can make more just don't get to greedy.

Long SDS calls
Long USO puts
Long DBA
Long TBT
Short BAC puts july 12
Short NAT puts june
Short BUCY puts june

Jun 13 09:27 PM

[stockhawk:]

Whew! All the technical analysis has it's place and is a large part of this current uptrend,for sure. It only adds to my feeling of insecurity pertaining to market sentiment though. One small and often overlooked factoid is the increase in actual bank deposits from likewise insecure American consumers. All the gov't spending is a bit crazy and unnerving, especially to older folks, who stay as far away from risky investments as possible. Let's face it, with a bankrupt country, we are all walking on eggshells.

Jun 14 12:02 PM

[samretlew:]

I agree with the author completely. I have made 30 % since the market took off and have my exit strategy in place. Frankly, I don't care if it's a bull run or not. What matters is that I have made a small fortune. Of course, there will be choppy times ahead. If the market should crash, so be it; it won't clobber me but set me up for another run that will materialize under the nose of the doomsday sayers. There is no absolute black and white ever--not even in the markets. As any savvy investor know, the game is about probability. There is a good probability that the worst is over, and there is a ton of money on the sidelines, money that is not earning anything. There is a good chance, better than fifty percent, that this money is getting pushed/sucked into the current rally, extending it. True, eventually, the rally will peter out, whether it will be due to a correction or a resumption of the bear market. I really don't care. Be smart, cautious, and on your toes, and stick with the trend instead of whining and predicting the end of the world. Good luck folks. May you all prosper.

Jun 14 03:12 PM

[punk_ash:]

Oh yes, a new bull market. Yes, Chinese companies are so undervalued, many of them are worth a mere few hundred billions.

Jun 15 01:01 AM

[punk_ash:]

Many of the doom and gloom sayers did ride this rally. They have gotten out already Moron.


On Jun 14 03:12 PM samretlew wrote:

> I agree with the author completely. I have made 30 % since the market
> took off and have my exit strategy in place. Frankly, I don't care
> if it's a bull run or not. What matters is that I have made a small
> fortune. Of course, there will be choppy times ahead. If the market
> should crash, so be it; it won't clobber me but set me up for another
> run that will materialize under the nose of the doomsday sayers.
> There is no absolute black and white ever--not even in the markets.
> As any savvy investor know, the game is about probability. There
> is a good probability that the worst is over, and there is a ton
> of money on the sidelines, money that is not earning anything. There
> is a good chance, better than fifty percent, that this money is getting
> pushed/sucked into the current rally, extending it. True, eventually,
> the rally will peter out, whether it will be due to a correction
> or a resumption of the bear market. I really don't care. Be smart,
> cautious, and on your toes, and stick with the trend instead of whining
> and predicting the end of the world. Good luck folks. May you all
> prosper.

Jun 15 01:02 AM