The market has been going up since March of 2009. In fact, this is day number 1,970 of the current bull market run. Some investors have tried to fight the Fed and this trend, and as a result have not participated in it. But the bottom line is that the market is up 193% since it hit its bottom on March 9, 2009.
I have been fully invested the entire time. But I also recognize that like every bull market, this one will also come to an end. Another bear market is lurking out there somewhere!
The last bear market took 53% out of the market over a 15 month period. It was brought on by a real estate bubble, risky mortgage lending practices and easy money. Nobody knows what will cause the next bear market, but we need to ask ourselves some basic questions to help us identify a possible approaching bear.
#1 - Is the economy growing, or is it beginning to contract?
For now the economy continues to grow despite the negative GDP print in the first quarter of this year. We just got the latest GDP number of 4.0%. This exceeded the consensus estimate of 3%. But we need to keep our eyes on the economy going forward.
We get economic reports every week and all of these reports are important because they give us the temperature of the economy at any point in time. Economies are either expanding or contracting. It is very important to know what phase we are in the economic cycle. This current cycle is getting a bit long in the tooth.
#2 - Is earnings growth slowing down for a broad range of individual companies?
We are currently in the middle of earnings season. We get great information from "boots on the ground" companies that are operating in this economy as opposed to the macro-economic strategists. So it is important to track earnings season. This quarter, some companies are reporting great earnings, while others are not doing as well. There are patterns being developed. I would give this current earnings season a grade of "B" so far.
Some sectors of the economy, like healthcare and energy are flourishing right now, while there are other sectors like consumer discretionary that are clearly struggling. Of course the healthcare sector is currently receiving stimulus in the form of subsidized health insurance. It is a good thing to follow stimulus around.
By keeping an eye on corporate earnings we can gain important information about the overall health of the economy.
#3 - Is this market getting expensive?
Back in 2000, the market was trading at a multiple of 30 times forward earnings. Where are we today? The market multiple is only 17.29 on an average forward PE basis using the 3800+ stocks in the Best Stocks Now database. We began the year at a multiple of 18.58. So the market is not "cheap" but it is not expensive either.
#4 - Are the technicals of the market beginning to roll over or are they still in an uptrend?
By carefully analyzing the price trends in the market, the overall health picture of the market becomes much clearer. As you can see from the chart of the S&P 500 above, you can see that the primary trend of the market is still up. This is another name for a Bull Market.
#5 - Which asset classes and sectors are leading the market?
It is also important to track the different asset classes in the market. Is it the offense on the field, or the defense? As we look at the leading asset classes currently (I track 34), equities still dominate the top spots. The offense is still on the field.
Data from Best Stocks Now App
We can also get a clue from the sectors leading the market. Is it the defensive sectors leading the market or is it the offensive sectors? As we look at the leading sectors right now (I track 60), it is still growth sectors leading the way.
Data from Best Stocks Now App
I also consider the inverse funds as an asset class and sector indicator. Are they starting to rise in rank or staying down at the bottom? In a bear market they will rise to the top of the rankings like they did in 2000 and 2009. The Inverse S&P 500 (NYSEARCA:SH) is still at the bottom of the pile. It has remained there all throughout this current bull. It is still at the bottom.
So far this year, the market has been consolidating the huge gains it had last year. The question is: is it consolidating or topping out? Right now, it is almost like we have two markets. Most consumer-related stocks continue to look horrible. On the other hand, there are many areas of the market that continue to perform well.
Is the bear starting to wake up from its 64 month hibernation? Keep asking yourself these questions and you should be able to spot the bear before it eats your returns. I remain a bull for now.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.