There are lots of reasons to be bullish on the stock market these days, not the least of which is the +12.3% spike higher in the S&P 500 over the past 15 trading days. In short, there is nothing quite like big blasts to convince people to hop on the bandwagon as more and more investors seem to be worshipping at the altar of price momentum these days.
While we will readily admit that stocks are overbought and due for a rest from a short-term perspective, from a big picture standpoint, there are a bunch of reasons to be optimistic about the future. For starters, our indicators suggest that the recession ended in either June or July. Sure, the recovery may be weak. But anyone who has been around the game a while knows that the time to invest in stocks is BEFORE the official word is given that a recovery is underway.
Next up, the Q2 earnings season has clearly been better than expected as company after company has come in with results that beat the estimates. Yes, yes, we know about the complaint that the primary reason earnings are better is due to cost cutting measures (which, in English, means layoffs). But Wall Street is a cold hearted place and the bottom line is if earnings are better than had been expected, then stock prices go up – it’s that simple.
Then there is the idea of mutual fund managers putting money to work. With very few individual investors in the game these days, about the only way to produce a string of consecutive up days such as the one we saw recently on the NASDAQ is for big mutual funds to be moving cash from the sidelines into stocks. We saw this happen early in the spring and we believe we are seeing it again now. And one of the best arguments for stocks continuing to run from here is to remember that mutual fund managers aren’t chart watchers on a day-to-day basis. They simply start buying and then keep buying until their positions are built.
Next is the fact that history favors the bulls right now. As we pointed out this week, Bloomberg reported a big buy signal for the DJIA on Thursday as the Dow moved to 10% above its 200-day moving average after being more than 10% below the moving average. Bloomberg said since 1921, the Dow has moved higher after the signal 18 out of the 21 times and that the index was up nicely over the next three months as well as the next twelve months.
Sticking with history, we should also keep in mind that after a 15% quarterly gain (the S&P gained +15.22% in the second quarter of this year), the S&P has been higher twelve months later 8 out of 8 times since 1942 and 11 out of 15 times since 1929.
Speaking of buy signals, we’ve seen (and previously reported on) a big batch of reasons to be bullish over the last five months. We’ve seen relatively rare surges in breadth, something called a “golden cross,” and any number of chart patterns flash signs that it is time to buy.
So, with word that the economy is improving and that earnings are a bit better than expected, it is little wonder that there now appears to be a stampede of buying taking place.
How High is High?
But (you knew that was coming didn’t you?), the key questions we’re now asking are: (1) How high is high? And (2) how will we know when to leave the party?
While I do apologize for bringing up such negativity on a glorious Sunday morning, the trick to this game is to be most optimistic at the bottom and most pessimistic at the top. And after a run up of +45.96% on the S&P 500 since March 9th, we think it might be time to start thinking about an exit strategy – BEFORE the party gets out of hand.
The question of how far a bull market can run is always a tricky one. So, we’ll take a couple of different approaches and see if we can come up a hint or two as to the when it might be a good idea to leave the party.
The first thing we should remember is that the overall environment is one of a secular bear. Thus, this is NOT the time to set-it-and-forget-it or resurrect those buy-and-hope strategies that were so popular
