12 Reasons This Bull Market Has Legs (Part 2)

Includes: DIA, SPY
by: Lou Basenese

<< Return to Part 1

In yesterday’s column, I urged you to ignore the fear mongering about how September – historically the worst month for stocks – is going to usher in the end of this bull market.

Jim Paulsen, chief investment strategist at Wells Capital Management, agrees with me. “This market, as a whole, is starting to suggest this rally has more legs and sustainability than people might think,” he said.

Indeed. And here are six more reasons why …

7. It’ll Be Different This Time … Or Not!

PIMCO’s Bill Gross would desperately like us to believe in the “new normal.” Specifically, that a world that grows less rapidly generates fewer returns. The only problem? As I revealed last month, the data suggests otherwise.

According to research by Ben Inker of GMO, LLC, “Stock returns do not require a particular level of GDP growth, nor does a particular level of GDP growth imply anything about stock market returns.”

It all boils down to investors. They demand excess returns from equities for taking on additional risk. Equities have historically obliged. Lackluster GDP growth or not, that trend’s going to remain intact.

8. If You Want to Get Technical

Although I favor fundamental analysis over technical analysis, that doesn’t mean I ignore technicals completely. They indicate this rally has legs, too.

Ever since the June lows, the S&P 500 has been trading above its 50-day moving average.

As Bespoke Investment Group notes, “We’d have to break solidly below the 1,390 level before we’d turn less bullish, and we’d need to break below the 1,375 level for us to get negative.”

To put it simply – we’re in an uptrend. And you should never sell an uptrend short.

9. Don’t Worry, Be Happy

Individual investors are the worst market timers. They fall in love with stocks before collapses and swear off stocks before – and during – rallies. And this rally is no exception.

The latest data from the American Association of Individual Investors (AAII) reveals bullish sentiment dropped nearly eight percentage points last week to 34.27%.

They’re not just feeling glum, either. They’re acting on the sentiment, too. Last week, flows into equity funds ($2.1 billion) were less than half of the flows into bond funds ($5.3 billion), according to EPFR Global.

Of course, this behavior is merely a continuation of the long-term trend. Since 2009, individual investors have yanked a total of $420 billion out of equity funds. Meanwhile, they’ve plowed $910 billion into bond funds.

Add it up, and the sentiment and fund flow data all but guarantee it’s going to keep paying to be a contrarian. So go ahead and crank up the Bobby McFerrin tune. That is, if you’re fully invested.

10. Prozac, Please

Individual investors aren’t the only ones depressed about the outlook for stock prices. Sell-side strategists remain the most bearish they’ve been in 27 years.

The latest reading of Bank of America’s (NYSE:BAC) Sell Side Consensus Indicator came in at 44.4%, barely rising from last month’s all time-low of 43.9%.

To put that figure in perspective, consider that the 15-year average reading is about 61%. Or, as Bank of America’s Savita Subramanian said, “Given the contrarian nature of this indicator, we are encouraged by Wall Street’s lack of optimism.”

Me, too! Especially since a similar Index, Bloomberg’s STALSTOX Index – which measures the average recommended allocation for stocks by U.S. chief strategists – is also overwhelmingly bearish. It now rests at 41.5%, down from 61% at the start of 2012. (FYI: You can keep track of the Bloomberg Index, which is updated weekly, here.)

11. You Can’t Bank Volume

A profit is a profit. For some reason, though, the bears want us to believe that August’s gains really don’t count because they came on low trading volumes. You see, low-volume rallies aren’t supposed to be sustainable.

However, this bull market apparently didn’t get that memo.

Since the March 2009 lows, stocks are up 108%. If we strip out all the low-volume days, though – when trading in the SPDR S&P 500 ETF (NYSEARCA:SPY) was below its 50-day moving average – guess what? The S&P 500 is actually down 30.1%, according to Bespoke Investment Group.

In other words, this entire bull market has been a low-volume rally. Embrace it. Don’t fear it. And worry about profits, not volume.

12. Still Not An Outlier

“The average bull market advance is 34 months; this [bull market] is running 41,” says chartist, Louise Yamada, Managing Director at LYA. “It’s long in the tooth but we’ve been saying that for quite some time.”

And guess what? You could be saying it for a lot longer …

Since 1940, the average bull market has lasted more than 1,600 days. At 1,254 days old, the current bull market could last another year and still be considered average.

What’s more, five other bull markets resulted in higher profits, ranging from 125% to 582%. So the current bull market hardly qualifies as a historical outlier.

Bottom line: Forget about dull trading volumes and historically lackluster returns in September. This bull market has legs.