- Secular Bull "History" is repeating itself
- S & P trades in a 40 point range during March
- Short term indicators show divergence as market could 'break" either way
- Caution in the short term is warranted
There have been three "range-bound" markets since 1929. I also like to use the term "base periods" when describing these timeframes. Lets take a look at the 1966 to 1982 range bound "basing" pattern in the market during that period. When the market finally broke decisively above the DJIA 1000 , S & P 130 ceiling, which had actually existed since 1964, the pundits of that era ignored the pricing action of the markets and stubbornly clung to their valuation metrics that had worked during the 1966 to 1982 timeframe.
The time honored models of valuation based on historical Dow/S&P yields, and book values, as well as P/E ratios. Their models had been back tested and continued to prove accurate. Hereto, they worked well until late 1982. Then the August 1982 bull market began on the breakout above Dow 1000. It leaped to 2722 by August 1987. It went on to overcome the crash in October 1987, and the bank/real estate threat, along with the Iraq/ Kuwait episode in 1990. By the spring of 1998 it had run up to more than 9200.
As the market went higher and higher some of the once savvy seers saw their models flash warning after warning. However, anyone who got out of stocks on the basis of such metrics was left behind and lost out on a lot of profits. Those who stubbornly stuck with their valuation measures in many cases turned even more bearish. Does any of this sound familiar to the rhetoric that many are proclaiming about this current market ?
I remember many holding onto their theories, just as they are now, and accordingly they stayed bearish for years.. Along came the 1987 crash and those naysayers finally felt vindicated and in typical fashion they all trumpeted , "I told you so." However, in retrospect, the crash was one heck of a buying opportunity, but those negative nabobs never bought, even as the market continued its climb for 13 more years!!
Every time the stock market has broken decisively above the top side of a 10+ years "range-bound" market, it has ALWAYS been the dawn of a new secular bull market. I maintain that this time is no different.
Take note of the mid cycle low in 1974 during that base building pattern in the '66 to '82 time frame.
Fast forward to the present, and its easy to see what I have mentioned and displayed in other missives during 2013. The market once again has decisively broken out of a long trading range. The DJIA and the S & P was range bound from 2000 to 2012 until it broke to the upside last year. Both the DJIA (16302.77) and the DJ Transports (7515.18) traded to new all-time highs. This was accompanied by the index I refer to most often, the S & P 500, which broke and closed (1570) above the 1550 level which had capped that index for 13 years. Now, take a look at the mid cycle low that was put in during 2008, before the breakout in 2013 occurred, and where we are today. The similarities between the earlier "base" period of '66-82 and the latest one are profound.
After the 1982 breakout the market went on a journey over an 18 year period that took the S & P from 138 to 1550. If the market responds in the same fashion as the last secular bull, we are in the early stages of a large percentage move that has plenty of room to run. I remember the doubters in 1982, and I hear the same cries from the crowd that continues to disbelieve the present market action now. Instead of reacting to the price action, many are still clinging on to their arguments for disaster. So just as we saw in 1982, many are still on the sidelines in denial or outright bearish.
To date , history is indeed repeating itself.
I would be remiss if I didn't remind everyone that along with the last secular bull came dark periods that certainly will shake the foundations of every investor. As I pointed out earlier, 1987 rings a bell as an event that remains in the minds of many seasoned investors.
However as we have seen in the past that was also a chance to get into the market and reap the rewards of outsized gains for many years thereafter. Many forget that The S & P went up 270% after the "breakout" in '82, when it encountered the setback in '87.
I suggest, If & when the market does have a decidedly negative reaction to an external "event", it will also be an opportunity in the context of a Long term Secular Bull trend, and something bulls should not fear. Putting this market in context, it is up a mere 19% from the "breakout" level of 1550 and therefore I maintain what we are now experiencing is the very early stages of this bull run.
Yet, here we are once again as many seers of the new millennium era continue to stubbornly cling to the models that worked over the 2000- 2012 range bound period. As an example, the valuation measure that they cling to in an effort to make their case is the Cyclically Adjusted Price-Earnings Ratio (NYSEARCA:CAPE). I continue to argue that the earnings experiences we had between 2000 - 2010 were aberrations that have left the CAPE showing stocks overvalued for the last five years, and those that still cling to that valuation as a tool have been kept out of the market for the last five years. That is one of many examples of how one can affect their financial health, by holding on to these failed models. .
Looking forward, I believe there are at least 4 different material changes that are taking place right now that most are not recognizing and of course the naysayers will denounce.
I mentioned these back in Sept '13 :
- Revitalized Consumer Balance Sheets & the return of U.S. Household formation.
- The second generation of biotechnology
- Cloud-based information services, Tech revolution continues.
- The American oil shale play.
History has shown what happened to those that held on to their "models" in the last range bound market. Now I suggest history is indeed repeating itself and those with that same mindset may in fact be doomed to become prisoners of their models and condemned to skepticism. To be sure, if you don't change your indicators for the changing causal relationships, you are doomed to fail.
The long term trend is decidedly to the upside and I believe investors with a long term view can utilize the Secular Bull Theme and trend as their backdrop for making investment decisions.
However, as I have suggested time and time again, that doesn't suggest that anyone should throw caution to the wind at these levels.
In the short term:
Weakness in technology continues, which could be an issue for the overall health of the market in the short term. Wednesday's break of the 50-day moving average for the Nasdaq was confirmed by yet another push lower. Yet, the Financials continue to be strong, which is a good sign, because typically the banks top out months prior to any kind of top in the overall markets.
So those two examples along with many others show the divergences I am monitoring. That said, "Up mornings and down afternoons is not particularly good near-term market action;" and, that is exactly what we have been witnessing lately. In fact the action that we saw on the last options expiration day (3/21), was downright ugly.
The S&P 500 continues to trade in a volatile fashion, but it has yet to do much technical damage to the bull trend & the various mixed signals that are flashing are expected with the kind of action we have witnessed this year.
The moves to lower levels this past week was contained by the mid-March lows near 1,840, so I would continue to respect the bull market until that level gives way to lower prices. Furthermore, my short term indicators are not indicating that the market is "overbought" at the close of this week. So one could make a case for a retest of the old highs.
The contrary opinion has the market breaching the 1840 level, which would indicate a deeper decline towards the 1780 - 1800 zone would be in store.
Which way do we 'break' or is it more of the same churn , take your pick .. For the LT investor, stay the course and keep searching for opportunities , either to add to a LT position or initiate an intermediate holding on a name that has been dumped during the sector rotation that has been prevalent.
Best of Luck to all !