No one in the business of investing likes to look dumb. Whether you are a pro running other people’s money or simply managing your 401(k), nobody wants to go out on a limb and be wrong right now – especially now. And in our humble opinion, this is the main reason why so many so-called experts are doing an awful lot of waffling and hedging their bets about calling this market what it is – a new “mini” Bull Market.
Everywhere you turn you can hear people telling you why you need to be careful and that you shouldn’t be optimistic about the future. In short, since we’ve just completed one of the worst bear markets in a generation – a bear that took the Dow down -53.8% from its October 9, 2007 high and pushed the S&P 500 to a loss of -56.78% – it is hard to take a stand and say “it’s over.”
You see, everybody who has studied history to any degree knows that the lows of a bear market are often “retested.” During this “retest” phase, fear tends to return in earnest and it usually feels like we’re returning to the bad old days of pain and misery.
While anyone calling for a new bull market, regardless of whether they are using the term mini, cyclical, or secular, will tend to look dumb during the retest phase, we want you all to know that it is during this part of the cycle that you have to forget about looking and feeling dumb and start buying – if you haven’t done so already. Because, the bottom line folks, is that the retest phase is also called the “second chance buy.”
Now What?
Before we go any farther, we should once again point out that we believe this will prove to be a “mini bull” that is likely to last somewhere in the range of many months to a year, and not a secular bull that could last 10 years or more.
Our thinking is that the consumer has seen their net worth take a massive hit. We’ve all heard the 201(K) jokes and everybody knows that their house isn’t worth what it used to be. In addition, debt is once again a four-letter word. Because of this, we don’t see the consumer returning to the days of easy spending any time soon.
It would also be logical to assume that with the baby boomers trying to retire and younger consumers trying to pay down their credit cards, more money is likely to go towards savings and there will less discretionary spending. Thus, the economic recovery is probably going to be weaker than what we’ve seen in the last 20 years.
In looking at the big picture, the Dow is now back to where it was at the lows of October and, excluding two days, November. Thus, we can say that the recent impressive rally has simply undone the negative discounting that was applied during January and February. From where we sit, this means that there is plenty of upside “discounting” that is still available as the economy begins to recover.
The point is that while the “easy money” has been made over the last 6 weeks, there is likely to be some serious upside left in this mini bull. Remember, according to Ned Davis Research, the average “cyclical bull within a secular bear” sees gains of +65% and lasts more than a year and a half.
You may also recall from our previous reports that the majority of the gains occur in the first one-half of the time. And it is for this reason that we would embrace a retest of the lows in the near future. In short, any move back toward the lows effectively presents more upside opportunity for buyers.
It is also important to note that from an historical standpoint after the bulls begin to romp, the market has been higher 3, 6, 9, and 12 months later – without exception. So, hopefully this explains why we’ve been pounding the table about the idea of “buying the dips.”
Where to Invest Now?
One of the biggest lessons I’ve learned in my investment career is that leadership changes when the market makes a costume change. In other words, the areas that are leaders during bear markets are NOT the leaders of a new bull market. Thus, you’ve got to make a change in your thinking right about now.
So, where should we be looking to invest these day? While it may be hard to do, we’re here to say that it is time to think more aggressively. Think about areas that have higher betas. Think about the stuff that typically provides the best returns during bull markets. In short, think small caps, technology, financials, and the emerging markets.
While it may sound counterintuitive to our discussion about the future of the economy, you can also think about the consumer discretionary area. Although we don’t expect the consumer to be “big spenders” going forward, remember that this is an area that was beaten down during the bear as traders discounted the idea of the consumer going into hiding during the recession.
Next, although it may be hard to do at this time, in terms of betting on the eventual economic recovery, you will want to look at the energy and materials sectors.
Finally, please know that we are absolutely, positively NOT suggesting that you run out and bomb into stocks right this very minute. No, we think a “buy the dips” approach makes a lot more sense from a tactical standpoint. And since the market typically experiences a retest phase, you might want to get ready to pounce if/when we see stocks pull back.
For those that do not have any money invested in stocks right now, we understand that it is tough to buy after a +28% run off the bottom. However, as we pointed out, the Dow is basically sitting where it was last October. So, if you think this run has farther to go before we see a pullback (a 50/50 proposition in our opinion) then getting a “starter position” established could be considered an appropriate strategy.
On that note, let's keep in mind that although we've had a very nice rally over the last six weeks, the Dow needs to gain +74.2% from here in order to return to its high and the S&P 500 will need a rally of +80%. Thus, there is still some upside left from a big picture standpoint.
As for our portfolios, we are currently enjoying the ride and are anxiously awaiting a pullback to get more invested.
Wishing you all the best for a profitable week ahead,
David D. Moenning
Founder TopStockPortfolios.com
Positions in Stocks Mentioned: None
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