Hello? Anybody Home?
By Leon Tuey
Seeing the above title, readers probably think I have taken leave of my senses, no doubt. The bears are growling ever louder and investors have become totally risk-averse as they have been piling into bonds and are forsaking stocks.
They continue to point to the poor economic environment and the high unemployment rate, and sadly conclude that the market has nowhere to go but down. Little do the grizzlies and the chicken littles realize that the correction has ended and the secular bull market has resumed.
Also, little do they realize that when the economy is booming and employment is full, these are signs that the bull market is about to end as the Fed, in their attempt to cool the economy, will start to tighten.
In my August 25th report – Deflation? Double Dip? Record Bond Love Affair?, I pointed out that the recession was over at the end of June 2009 and a V-shape recovery ensued. The recovery, however, was sidetracked (but not de-railed) by the turmoil in Europe.
But the market is telling investors that despite the widespread pessimism, the recovery will re-accelerate. My optimism was not based on hope, but by listening to the market. The “blowoff” in the bond market, the strength in commodities, the rise in the Baltic Dry Index, the bottoming of the Shanghai Stock Exhange Composite Index, and the record highs and new bull market highs by the world stock markets were some of the many reasons for my optimism.
The bears are in denial and love to flaunt their ignorance (they must be masochists). They continue to blab on about “a cyclical bull market within a secular bear” which is absolute nonsense! Clearly, they confuse the S&P 500 Index with “the market.” As mentioned numerous times, the S&P is not “the market” as on any given day, over 5,000 stocks are traded. That is “the market.”
Moreover, they fail to understand or take notice of the fact that the Index is heavily weighted in financials and high-techs. Hence, major moves in these sectors have a huge impact on the S&P.
More disturbing is that the bears clearly don’t understand what determines the market’s long-term trend. Read my lips, grizzlies: The market’s long-term trend is driven by the monetary, economic, valuation, sentiment, and supply/demand factors. No ifs and buts! Short-term moves, however, are determined by technical and sentiment factors.
What investors are witnessing is not “a cyclical bull market within a secular bear.” A secular bull market has been in place for more than two years. It’s not true, you say? Again, read my lips: Led by the airlines, a “rolling bottom” commenced in July 2008. In October 2008, when the world panicked, over 60% of the stocks made their lows (the Asian markets, the Latins, Portugal, and South Africa also made their lows in October, 2008).
Other stocks bottomed in November 2008 through February 2009. It was the final pounding of the financials (a heavyweight), which brought the S&P 500 Index to its low in March 2009. The deep cyclicals and real estate also bottomed in March 2009.
Although the S&P peaked in April, 2010, a “rolling correction” commenced in April 2009. Witness many of the shipping and solar issues, as well as others peaked in that period. But as mentioned earlier, the correction has ended (in June this year) and as can be seen in the charts, the secular bull market has resumed.
In June, the market was grossly oversold and bearish sentiment was at an extreme. As for the long-term, the major factors remain bullish and point to the continuance of a secular bull market.
Note:
1. The Fed remains accommodative and the yield curve is positive.
2. Although sidetracked by the turmoils in Europe, the recovery is on track and will re-accelerate before long. That is the clear message given by the market.
3. The market is dirt cheap. The blue-chips in particular, represent a once-in-a-lifetime buying opportunity.
4. Sentiment backdrop is ideal as pessimism is at an extreme. Investors have sworn off equities and are having a “record love affair” with bonds. This is not the sentiment backdrop one sees at market tops, but at major market bottoms.
5. Cash on the sideline remains humongous.
6. The market’s internals continue to improve – “the market” is stronger than investors think.
In conclusion, the secular bull market has resumed. In a secular bull market, cash is trash. Given the “record love affair”, bonds are not the place to be. As growth will re-accelerate, the economy-sensitives are favored.
Leon Tuey is a veteran technical analyst