The most common definition of a bull market is a move of +20% or more in the major indices that lasts at least three months. With the S&P up an even +28% from its March 9th closing low, the bulls have put together a nice run that, with the passage of time and a fair amount of hindsight, will likely be declared a new bull market.
To be clear, we are not suggesting that we are embarking on a massive move in the stock market that is likely to last many years. No, as we’ve been saying, we’re calling this a “mini” bull during which we could see gains on the order of +65% or so over a period of 5 to 12 months before the bears are able mount another challenge.
In order to dispel the suggestion that we’re simply pulling numbers out of the sky, remember that the expectations we’re putting on this “mini” bull are derived from the results of the previous “mini” bull markets that occurred within monster bear markets. And while the sample size of such events isn’t large, we’d much rather use history as our guide here than try to make it up as we go along.
As we pointed out in our April 5th report , history shows that there have been five other occurrences of mini bull markets that occurred during secular bear markets. The stats from the NDR computers show that the average gain during these markets was +65.3% and that the mean duration of the move was just under a year. It is also interesting to note that the shortest move took place over five months, while the longest mini bull ran for five years.
Thus, the first point we’d like to make this weekend is that we believe we’ve got a new “mini” bull on our hands and that we should play the game accordingly.
Time For a Correction?
While there is a fair amount of disagreement over whether or not this is indeed a new bull market, just about everyone trading stocks these days will agree on one thing – the market is due for a correction that lasts more than a day or two.
Since we can argue that the stock market tends to move in a manner that often confounds the masses, we might want to consider that the assumption that stocks must correct – and soon – might be a little too obvious right now. However, putting that argument aside, we will also agree that stocks “should” pull back in the near term.
The bears will argue that such a pullback will represent the first step in their return to glory. And like Monday’s nasty dive, it is likely that any corrective action will “feel bad” on an emotional level.
However, the big point to this weekend’s missive is that the upcoming correction is NOT to be feared. Instead, investors should welcome any pullback in prices as an opportunity to become more invested.
Don’t Fear the Reaper!
Let’s keep in mind that corrections are a normal part of the investing game and that during normal times, we see corrections of -5% to -10% at least a few times a year. But with the pain of the bear market still fresh in investor’s minds, we can understand that there aren’t many people actually hoping for a dip in stock prices these days.
However, history shows that the corrections at this stage of the game are likely to be far less painful than during normal times.
If we look at the largest corrections that have occurred within the 34 bull markets since 1900, we see that the declines in the DJIA have averaged -10.97% and lasted an average of 38 days. To which, most investors would say, “no thank you.”
But, but, but… if we narrow the focus a bit and attempt to identify markets that are similar to what we are experiencing now, the story is MUCH different. Thanks to the stellar analysts at Ned Davis Research, we see that there have been seven “mini” bull markets that occurred within secular bear markets. During those seven bull markets, the average decline for the biggest correction occurring during the first three months was about 20% less than normal times or -8.9%.
And as they say on T.V., “But wait, there’s more…”
One of the indicators that helps us make the argument that we’ve got a new bull market on our hands is something called a breadth surge. To digress briefly, a breadth thrust occurs when the 10-day total of advancing stocks (as measured by stock-only advance/decline data – NOT the data provided by the NYSE, which includes all kinds of bond funds and non-operating companies) exceeds declining stocks by nearly 2-to-1. In short, history shows that since 1947 a breadth surge buy signal has meant results for the S&P 500 that are at least double the norm over the next 1, 3, 6, and 12 months.
The reason we bring this up is a breadth surge signal also means that corrections within the first three and six months of a new bull market tend to be significantly less intense. And the good news is that we saw a breadth surge signal on March 23rd.
For example, of the 28 breadth surge buy signals that have occurred since mid-1947, there was only one instance of a correction exceeding -10% within the first three months of a new bull market.
In fact, during the first three months of a new “mini” bull market when a breadth surge buy signal has been given, the maximum correction has averaged just -4.0%! And over the first six months, the maximum correction has averaged only -6.0%.
The Bottom Line: Corrections that occur during the first three months of a new “mini” bull market that has been accompanied by a breadth surge signal have been FAR less painful than normal (-4% vs. -11%) and should be viewed as buying opportunities and NOT reasons to sell.
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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The opinions and forecasts expressed are those of David Moenning, founder of TopStockPortfolios.com and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report and on our website is for informational purposes only. No part of the material presented in this report or on our websites is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed nor any Portfolio constitutes a solicitation to purchase or sell securities or any investment program. The opinions and forecasts
