We Are Not Yet High, This Bull Has Further To Fly! by Stephen Aust, MarketCycle Wealth Management
This blog was written before the market open on Monday, September 12, 2016.
As I’ve said for 7½ years now: “We’re still in a bull market!” Yes, the market dropped on Friday and it is likely to fall a bit more over the next two weeks, and so what… as I’ve said a zillion times now, bull markets always zig-zag up and they always will. So, I’m saying that we are still in a bull market and the market is NOT topping and we are NOT heading into economic recession.
Risk levels continue to fall to very low levels and the chance of a recession 3 months out is less than 5% and this is extremely low. Market pullbacks are chronic and routine, are nothing to fear, and most are temporary and fairly benign. We are in the late-stage of the current market cycle and historically, late-stage periods typically last for 1-3 years. Certain assets will do well in the late-stage and others will not. The late-stage is a sector & asset pickers market (yes, MarketCycle does this) and passive, non-tactical and buy & hold portfolios will underperform. For various reasons, the days of individual-stock pickers beating the market is over, but mainly because markets are now too efficient on a micro level. This is not the time to use leverage and stock positions generally need to be cut back a bit and that money should be pushed toward late-stage assets… but “we’re still in a bull market.”
The following sections show the RISK portions of our paid member’s site: MarketCycle Wealth REPORT. Novice readers only need to understand that the key word shown below is: BULLISH… this essentially means that we are in a lower risk period and that any corrections will be temporary and soon forgotten.
This first chart shows the stock market off of the 2009 bottom. The PRIMARY-TREND has been zig-zagging up which is what ALL bull markets ALWAYS do:
This next chart shows the stock market over the past two years. The prolonged 2 year sideways correction released as much “overbought” pent up steam as a 20-25% downward correction would have done and this has reduced overall long-term risk levels (even though it is absolutely normal to get routine pullbacks) On Friday, the market drop stopped right on support (at S&P 2128) and thus re-tested the 2015 highs. There is additional S&P-500 support near 2100 and, should that fail, near 2000 (“support” is that area where falling stocks are likely to turn and head back up). So, could stocks move a bit lower in the short-term? Actually, I think they might… but the ultimate longer-term direction is higher because “we’re still in a bull market.”
Bond yields appear to have now bottomed and bond prices have now reached overbought conditions (yields up = bond prices down). This means that fixed-rate bonds will now likely roll sideways-ish and then sell off. Initially this should cause some near-term turbulence in the stock market as investors worry about what this means. Longer-term, this bond money will very likely slowly rotate into stocks and drive the stock market higher (the typical buy & hold 60% stock/40% fixed-rate bond portfolio may be hurt).
What is the one thing that investors are most afraid of? The Federal Reserve raising interest rates. The next Fed interest rate announcement is next week on Wednesday September 21 at 2:00 PM. What happened the last time that the Fed started to steadily raise rates? Did a bear market begin? NO. This final chart shows the period that the Fed last raised rates (2004-2006) and then to the market top a full year after they stopped raising interest rates (the bull market continued until late 2007). What happened to stocks during this period? Stocks went UP. When did stocks stop going up? When the economy couldn’t expand any more and began to contract into recession. The 2008 financial crisis did not cause the last big downturn since the bear market actually began in October of 2007. Again, what are the current economic recession chances 3 months out? There is a 96% chance of NO recession within the next 3 months. We’re still in a bull market. “We are not yet high, this bull has further to fly.”
CLOSING THOUGHTS: It is time to embrace our fears. Markets are counter-intuitive and this is why so many investors lose money by buying and selling at the wrong times. The time for you to worry about a new bear market (which is a long-term falling market) or an economic recession (which is a bear market on steroids) will be when you are euphoric, not when you are fearful and this is why people continue to buy high (during euphoria) and sell low (during fear). Repeat after me: “We are not yet high, this bull has further to fly.”
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