Friday, April 23, 2010
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!