Market outlook: Spreading some bull on turkey day

Happy Thanksgiving, Canada! Celebrating with your extended family on all your favorite foodstuffs and libations? Conversation inevitably evolving from elucidating insights to more passionate opinions? Given that The Great White North is deep into a close and heated election, we’ll gladly leave you and your kin to beat the stuffing out of that topic. We’ll stick to The MoneyLetter’s editorial mission of “Strategies for Successful Investing”. A few days ago we featured Chartered Market Technician Ken Norquay’s market outlook that the bear market has begun. Today, Barrie, Ont.-based ValueTrend portfolio manager Keith Richards argues that we’re just three years into a 15- to 20-year secular bull market. Happy Thanksgiving, Ken and Keith!

“I love the smell of napalm in the morning!” exults Lieutenant Colonel Bill Kilgore (Robert Duvall) in the 1979 classic war film, Apocalypse Now. I have similar sentiments about the stock market’s summer carpet-bombing. I love the smell of fear on the street (Wall Street that is): it provides us with opportunities. I love my cash (we’ve been 50 per cent cash in our equity model for the summer). Regular readers of The MoneyLetter will, I hope, have paid attention to my recommendation to raise cash back in the spring. Cash will provide you and me with the means to take advantage of the upcoming opportunities. But we’re not quite there yet.

I recently noted that the sentiment, volatility and breadth indicators that I follow are currently turning positive. Those same signals were bearish in March, and inspired us to sell out in April of this year. While the sentiment and breadth indicators are signaling bullish again, it is important to realize that they are forward-looking indicators. This means that they will signal ahead of the move—just as they did in March of this year (markets didn’t fall until August). Our job now, as technical analysts, is to more precisely define the timing of our entry point to take advantage of this market outlook for a very likely resumption of the bull market.

Identifying an ideal entry point

How will we identify an ideal entry point? I tend to use history as my guideline for such decisions. Stock market bottoms require a “capitulation” moment, followed by some near-termed relief rallies driven by “buy on the dips” retail investor mentality. These relief rallies are taken down by subsequent selloffs inspired by traders selling to willing retail buyers. At some point, the retail buyer gets wise to these up-and-down actions, and stops buying the dips. A final washout occurs—which may or may not carry the market to a lower point than the original capitulation point.

Rarely do we get a nice tidy “V” bottom. My best guess for that final washout bottom will be either late September or some point in October. And that, my friends, is going to offer us some truly exciting buying opportunities.

How to date a bull

By the way, I’ve had a few enquiries as to whether I think the recent six-year bull market (2009 to present) has ended, leading into a new bear market cycle. According to longer-termed cycles, we should be in for a 15- to 20-year secular bull market. And, by the way, that 15- to 20-year secular bull market officially broke out in 2013 after the S&P 500 Composite Index finally broke its lid of 1,550—NOT in 2009! We cannot call a market a secular bull market until a new high has been established—and such a new high didn’t happen until the summer of 2013.

Sideways is not a bull

Because no new high appeared on the U.S. markets until 2013, the period from 1999-2013 must be viewed in its entirety as a secular sideways period.

A graph of the Dow Jones Industrial Average that plots the index for over 100 years, beginning in 1900, shows us that the 10- to 15-year secular sideways phases lead us into 15- to 20-year secular bull market phases after these new highs are reached.

This bull is young

We are only three years into the current secular bull market despite the bottom of the last trough of the sideways market being in 2009. As noted above, the secular bull market didn’t verify itself until its break to a new high in 2013. Thus, it may be reasonable to expect a continuation of the bull market for at least 10 more years despite the near-termed madness, and despite an end of easy money.

A frequent topic these days is speculation about when the U.S. Federal Reserve will raise rates and the impact this will have on the markets. In a nutshell, rising rates in the U.S. have historically benefitted the stock markets—at least at first. So don’t fear the Fed.

A ‘stealth bull’ of sector rotation

Having said that, I do believe the new leg of the bull market will be a “stealth” one of sector rotation.

As noted above—the big picture still looks bullish, and I will be buying bargains with my hordes of cash when the time is right. I hope you’ve been holding cash and experiencing the same results in your portfolio.

In my next column, I will provide you with a list of sectors and individual stocks that I am watching for an entry point. At this time, it is premature to mention any buy candidates, given my propensity towards holding cash for a while longer.

 

The MoneyLetter, MPL Communications Inc.
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