With the S&P 500 up a hair under +30% since the March 9th low (+29.7% to be exact), it is worth noting that interest in the goings on in the stock market is on the rise. My guess is that the average investor is still mourning the massive hit they took in their 401(k) plans, however those that are paying attention are starting to ask some questions.
In speaking with several different types of investors this week, it became obvious that some of the terms we use to define the environment may be more than a little contradictory. For example, unless you spend your days dealing with the machinations at the corner of Broad and Wall, it makes sense that terms such as “mini bull,” “secular bear,” and “correction,” “pullback,” or “pause that refreshes” wouldn’t be used in the same sentence.
So this weekend, we thought we’d take a moment to spell out our view on what we see happening in the market these days.
Mark the Calendar!
For starters, get out your sharpie and color in a big smiley face on April 28th. The common definition for a bull market includes two variables: percentage gain and elapsed time. According to our favorite keeper of statistics – Ned Davis Research – a bull market is defined as a gain of 30% or more after 50 calendar days. The good news is that Tuesday was the 50th day after the March 9th low and since the Value Line Composite was up more than 30% on that day (actually it was up 53%), it’s official – we’ve got a cyclical bull market on our hands.
However, this is where some of the confusion begins to come into play. You see, there are two common types of bull and bear markets – cyclical and secular. For experienced market players out there, please forgive me for insulting your intelligence. But, as I mentioned above, based on my conversations with investors over the past couple of weeks, this is an area that needs some clarification.
Think of a secular market move as something that lasts for many years; usually more than ten. For example, the period from 1965(ish) through 1982 was termed a secular bear market. Then we saw a secular bull market from the fall of 1982 through March 2000. And from where we sit, we continue to be in a secular bear market. (The first tip on this score is the fact that as of the end of 2008, the ten-year return for the Lipper Large Cap Growth fund index was -34.27%.)
On the other hand, a cyclical market move – which we prefer to call mini bulls and mini bears – occurs WITHIN a secular move. These moves are much shorter in nature and if memory serves, usually last somewhere in the vicinity of 5 months to a year or so. There are exceptions of course such as the 2003 – 2007 cyclical bull move; but for the most part, a mini move is something that can be valuable to more nimble investors but not so helpful to the buy-and-hold crowd.
So, to clarify, we believe that what we’re currently seeing is a mini bull market that exists within the secular bear market that began in 2000.
Know Your Cycles
One of most important tricks to successful investing is to know and thoroughly understand your time-frames. For starters, you need to quantify what short, intermediate, and long-term mean to you and your portfolio. In addition, it is vital to recognize that the experts you trust may define the “short-term” completely differently than you do or even the next guy on TV.
For example, to a day-trader, the idea of a short-term position may be one that lasts only a few minutes or hours, while the intermediate-term might be defined as sometime before lunch. However, to the institutional investor, the short-term view may be something more along the lines of six months.
So before we go any further, we’d like to spell out our definitions of the time cycles investors deal with. To be sure, there will be disagreements on our definitions and we are not saying our way is the right way – but these are the terms and time-frames we use in our work.
-
Wiggles and Giggles Moves lasting from one day to a week
-
Short-Term: Up to three months
-
Intermediate-Term: Three months to six months
- Long-Term: Six months to eighteen months
It is also important to understand that portfolio managers will often allocate portions of their portfolios to different time-frames (as well as different styles). For example, it might make some sense to allocate one half of a portfolio to the long-term cycle using growth stocks and then maybe 15% or so to a flexible style that plays the shorter-term moves. We’re not saying this is the right thing to do, but it is a fairly common practice these days in the hedge fund community.
From a personal standpoint, I utilize just such a strategy. I have approximately one-third of my personal investments allocated to the Top Stocks strategy (a more concentrated version, of course), which is designed to play in the intermediate-term world. I have one-third of my portfolio allocated to shorter-term trading in the U.S. market. And I have a third allocated to the intermediate-term via a “go anywhere” global approach. This obviously isn’t right for everybody, but I thought it might be a good example of how different strategies and time-frames are used in portfolio construction.
Where Are We Now?
Okay, now let’s jump back out of the textbook and back into reality by trying to answer the question: Where are we now?
From a big-picture standpoint, as we’ve mentioned, we believe that we’re in the midst of a multi-year, or secular, bear market that could go on for several years yet. However, the good news is that we saw a new mini bull market begin on March 10th, which is something that could see gains of 65% to 80% before it’s done.
Thus, it is vital to recognize a couple of things. First, the current move is only one-third to maybe one-half over. And second, this is NOT the time to simply set-it-and-forget it. You absolutely, positively MUST be an active manager in the current environment.
From where we sit, the proper game plan is to get invested and ride the current mini bull with at least a portion of your portfolio. We obviously don’t know how long the ride will last, but history suggests that there is more upside ahead over the next six months. Yet, we will also suggest that investors have a plan for dealing with the next mini bear, which will likely occur when the anticipated economic recovery runs its course.
We’re not saying that you will need to become a day-trader – on the contrary. We’re simply suggesting that over the next several years, you can’t be
