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Praveen Chawla
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I taught my self investing after I got tired of losing money in the hands of so called "professionals" over the years. I figured it's better if I lose my own money - at least I can blame no one else for my mistakes. I immigrated to Canada from India in the 80's with $10 in my pocket... More
  • Three reasons why this bull is young and healthy. 0 comments
    Dec 28, 2009 7:52 PM
    I don't foresee any bear market on the horizon (which is at least 6 months).  My reasons are as follows:

    1.   Technical's.

    Technical factors are very positive.  The market has momentum and  is continuing to make new highs.  This can be seen in long term monthly charts.  S&P 500 has decisively crossed over price envelope channels signaling a sustainable bull market.  The last such cross-up occurred in 2003 and before that in 1998 and 1990.  A cross over after a recession has invariably signaled a sustainable bull market.
    For full interactive chart click here. Microsoft Silverlight in needed.
    S&P Bullish crossover envelope channels

    79% of the equities in the S&P 500 are showing "bullish" patterns.   This compares to 14% in March 2009 and 2% in Oct 2008.

    S&P 500 Bullish % index
    2.   Economy

    The economy has recovered and business conditions are now normal.  The ADS index maintained by Philadelphia Fed which measures business conditions has signaled that the recession has ended.  The improving economy has already started showing up in upside earning "surprises".  This positive momentum will continue.

    3.  Interest Rates.

    The yield curve is now extremely steep and has been getting steeper.

    This means two things - the Fed is keeping interest rates low at the short of the curve but is losing control at the long end of the curve (it cannot continue with Quantitative easing for ever).  This means interest rates are rising for long bonds and the inflation play is finally underway.  Historically this is very positive for equities as this implies the return of pricing power.  This is clearly seen when you compare long term monthly rates of 3 month T-Bills with rates of 30 year and 20 year T-bonds.  In each case a "loose" monetary policy has lead to stock market bull.

    Low interest rates have also restarted LBO activity and other merger and acquisitions.  Most of these M&A's are being financed by debt not equity, clearly indicating that sophisticated market players are judging equity to too undervalued to use as currency but are paying 40 - 50% premium in cash.

    Disclosure: Long Equities
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