For those of you who have hibernating in your bear caves, wake up, take a look at the chart at the right. This is no time for bears; this chart looks very much like a classical bull market -- higher highs, higher lows -- with significant tests along the way.
The chart at the right is a 12-month chart of the Standard and Poors 500. It has climbed a proverbial wall of worry over the past 12 months and now sits at a new intermediate high.
Yet as classical as is the bull market price chart, so too are the classical wailings of the bears who are left back at the abyss, staring into the dissipating darkness.
The bull market in stocks is for real. It is not a reflex action, or an illusion. It has legs and it will continue to lay waste to any bears it encounters. The reason is simple: corporate earnings for the fourth quarter in a row are off the charts. These are not "less-bad" earnings, these are good earnings and good sales to boot, even dividends have started to tick higher. Indeed, it now appears that S&P 500 operating earnings for the first quarter will be up nearly 70% over the same quarter a year ago.
Ah, but the bears cry out "Too far, too fast. The S&P 500 is up nearly 82% from its low of 670 on March 9, 2009. It cannot sustain this move; surely a correction of monumental proportions is near." (Please see comments section for a correction a loyal reader made)
But I answer, "Too low, too fast." The market fell by nearly 50% from October 2008 to March 2009. It fell on fears that mankind was powerless to correct the calamity he had created in the subprime crisis. It fell on hope being tossed away as though it did not 
exist. It fell on every doom-filled tirade of the fear mongers. Finally it fell, well, because it fell yesterday."
I have said many times that in understanding an upturn of the market, you must study the downturn. The chart at the right is a three-year chart of the S&P 500. It clearly shows how fast stocks fell from August and September of 2008 to the market bottom in March of 2009.
Yes, indeed, stocks are moving higher, but they are moving higher in an orderly fashion with little signs, yet, that a capitulation by the bears has occured. And until the bears capitulate, the market's path of least resistance is up.
Looking back at the first chart, it is clear that after the bottom was made in March of 2009, the S&P 500 has "saw toothed" it way higher, with buyers arriving every time the sellers started to take charge and sellers appearing each time the buyers appeared to be winning. This is what I mean by a classic bull market. It has been a tug of war trending higher. These kinds of classic "saw tooth" markets almost always occur after severe market corrections.
Think of it this way: big sell offs in the market always come swiftly and sharply and are always accompanied by very bad news of some kind. Traders are slow to react to the encroaching bad news, but eventually capitulate by selling out, and excuse themselves for cutting bait at the bottom by saying that things can only get worse. They have no faith in history; they have no faith in the principles of economics. Evidence of this capitulation shows up in spikey price action such as that from November of 2008 through March of 2009.
Here is a blog we wrote on March 20, 2009, just a little over a year ago. It is entitled
"Is This the Bottom?" In it we briefly describe why we believed the market had collapsed and why we thought it was ready to turn higher.
Here is a short quote from that blog:
"Indeed, one could say that we are floating in a sea of value. All we need is for some sort of good news to propel stocks to much higher levels."
In our judgment, we are still floating in a sea of value. Earnings are estimated to be up in 2010 by 25% and 20% in 2011. We are convinced the market has not priced in all the good news that is coming. Indeed, we will only start to worry about valuations when stock prices start getting spikey to the upside. That would mean that the bears have capitulated and become bulls. You know what comes after that!
Friday, April 23, 2010
This Is a Classical Bull Market
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5 comments:
Ah, but the bears cry out "Too far, too fast. The S&P 500 is up nearly 45% from its low of 670 on March 9, 2009. It cannot sustain this move; surely a correction of monumental proportions is near."
Uh, Greg, I'm a tad concerned about your ability to do basic math. The S&P is up more like 82% (before dividends) since its 670 low.
j'adoube
You are so right. Glad that you caught it. I had meant to say the market was up nearly 45% over the last twelve months. We have just sent out our quarterly client and letter we speak on several occasions about what has transpired over the last twelve months. Twelve months got stuck in my brain. As I re-read the blog, however, I believe looking at the market from the bottom to the present is the more correct way to look at it. Thus your 82% is the right number. Normally, I let errors be errors but since you caught this before it has been republished to our clients, with your indulgence I will change the wording. I will provide a note to see our discussion here. We have lots of math majors. They will make me cough up mea culpas all around. Thanks again, and thanks for following the blog. Hope it has value to you.
Regardless of whether this is "real" or fabricated from excessive governmental stimuli, where we are is here. It has been a wonderful rally. One can say that companies cut more aggressively during this recession than any time in history, and because of this are reaping wonderful earnings now. They cut, people, plants, inventory, 401k matches, dividends--and also benefitted from a flood of stimulus worldwide, yet did not add back any of which they cut... This has made for powerful earnings in Greg's world. Yet, critically looking at the numbers, revenue numbers are not to where they once were, so earnings numbers are largely the benefactor of cost savings and one time charges. The financials have benefitted from mark to myth accounting, free money for prop desks, and excess cash to trade from not returning dividends to normal levels (although I don't think they can afford to do so, if FASB is returned to a realistic marking methodology) Sadly, the metrics relating to a decrease in mortgage foreclosure is a slight of hand as every bank that has announced has had a notable increase in non-performing mortgages and loans as they choose to delay taking the next step...
And while the government did get in front of the problem last year and courageously avert a run off into the abyss, they have spent much of their dry ammo and have gotten less than satisfactory results considering the ammo spent. We have limited ammo should an unlikely second wave arise. More like though, since we are one of the largest contributors to the IMF, we will continue to weaken our country's balance sheet bailing out the likes of Greece, Portugal, Spain, Turkey, Ireland, etc, as the EU slowly falls apart. If there is a precedent for failure, it is in Europe, where consortiums of countries have banded together innumerable times only to disintegrate each and every time due to nationalism and divergent financial views. Some say Germany is just playing hardball, but some think they are truly bitter for having to carry the integration of East Germany largely on their own despite requests for financial assistance... These things are not quickly forgotten.
The correction we are entering into could be the shift from low quality and small cap leading to large quality leading---so Greg is likely going to be a happy camper, if only on a relative basis! Really, I think there are good odds we press for new highs...Democrats need it as it really is the only thing that might save their collective hides. Once through the off year elections, we enter the third year of the presidential cycle and history reflects well on that year. It will take simply horrible events or economic data to derail a run to new highs--and while unemployment isn't likely to get much better, it isn't likely to get worse either...so any surprise is likely to the upside.
Consolidation in a variety of industries could spur speculation on buyout candidates. Strong companies will get stronger and the weak will be bought or punished severely.
Mankind can imagine doom and gloom, but our knack for innovation and survival seems to keep us in an optimistic bias that is difficult to bet against even after the fourteen months we've experience so far.
I still believe we have far fewer worries in the market than we do in our society. The rift between have and have not has never been larger. That is feeding social acrimony and lashing out against the likes of Goldman Sachs, who by and large is being beat on because they are successful. Yes, there are a couple lapses that deserve some monetary fine, but by in large the events they are being crucified for are greatly exagerated. There are more fundamental questions of whether synthetic CDO's should have ever existed, but they didn't invent them, and they were meeting demand for product. And they did it better than anyone else out there.
We don't need more regulations...we need more enforcement of what already exists... big difference.
Does the reference to a 'classic' bull market mean that we are now out of the secular bear that began in 2000? If so, the markets never came close to the usual p/e ratios associated with the end of a secular bear. Or is this just another cyclical bull?
A couple thoughts on both the article and commentary:
1) Strong earnings have indeed been primarily the result of cost cutting during the past year. Even though we are starting to see some sales growth, the earnings growth has been spectacular because of the cuts in the previous 12-18 months. But that is how economic cycles work. You clear out the dead wood. When things do start to improve, the company, and the economy as a whole, find they are more efficient than before. The weaker competitors are gone and the strong ones have gained market share and higher margins.
2) While parts of the market are sporting fairly high valuations, many of the strong dividend paying blue chip companies that have benefited from their rivalies problems are selling at below market multiples. For example, Sysco is trading at 16x earnings and yields 3.2%. Low numbers by historical standards. Yet much of their competition has been significantly weakened during the downturn while they continued to get more efficient and gain market share.
3) Lots of individual investors have put most of their money into bond funds during the past year. Probably one of the worst investment decisions that could have been made. As these folks rebalance their portfolios into a normal mix of stocks, bonds and cash, we could see the market move higher. Furthermore, we are moving into the 3rd year of a presidential cycle and that has generally been bullish for the market.
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