Is this long-term bull market ending?

The MoneyLetter columnist Ken Norquay creates a long-term investment strategy based on his study of behavioural finance and its effect on the stock markets. He says if the S&P 500 Index drops to about 2310, the long term bull market will be over and it’s time to sell some of your stocks.

Bull_MarketMarket veterans sometimes say that a bull market climbs a wall of worry. It would be moreaccurate, though less poetic, to say that worrisome negative news accompanies a steady long-term increase in stock prices. It’s an observation about market psychology. We know that stock market tops are accompanied by positive feelings toward the economy, and bottoms are accompanied by times of fear and negative outlooks. Based on these truths, a ‘wall of worry’ implies a negative attitude on the part of investors, and hence insures the continuation of the up trend.

The weakness in this over-simplified approach is the difficulty in accurately measuring investor attitude. When are investors worried and when are they complacent? This month’s media coverage of the verbal exchange between North Korean and American leaders illustrates this dilemma. Are investors worried about North Korea’s nuclear capabilities or are they complacent? Clearly, American military experts are worried. That’s why there is so much US military equipment off the shores of North Korea. But, the American (and Canadian) media seem more interested in insulting President Trump than reporting the disturbing facts about North Korea’s nuclear capabilities. Are investors worried?

Perhaps investors are paying more attention to the positive economic news coming from both Canada and the United States. This positive economic news has given birth to rising interest rates and encouraging statements from the central banks of both nations.

It’s like the joke about the good news and the bad news: Are investors worried or not worried? But the value of your RRSP is no joke. If the market declines 50 per cent, as it did in 2001-2 and 2008-9, we need to take defensive action now.

Rather than make investment decisions based on our interpretation of today’s news, let’s turn our attention to the actual trend of the financial markets, and make our asset allocation decisions based on these trends.

What’s the trend?

The US stock market touched another, new all-time high this month. The up trend that began in March 2009 is still intact. An illustration of ‘wall of worry’ theory is the fact that the US stock market, as measured by the S&P500, has risen 14 per cent in the 9 months since the election last year. The US (and Canadian) media is still preoccupied with Mr. Trump’s presidency and has created a wall of worry. (Aside: So far, there is no sign of Mr. Trump’s famous wall around America to keep illegal immigrants out. But there is a solid wall of negative media reporting building up around Mr. Trump.) The long-term trend is up.

The Canadian stock market is currently slightly lower than it was at the top in 2008. Although there have been exciting ups and downs in the interim, the long-term trend is neutral. Since the ultra-low of March 2009, the TSX went up until 2014, but sideways since then. It has gone up 3.5 per cent in the past 9 months. Both the intermediate and long-term trends are neutral.

US 20-year+ interest rates started up a little over a year ago, when the bond market peaked in July 2016. FED policy has confirmed the down-to-up trend reversal. The trend of US interest rates is up.

Canadian 20-year+ interest rates are performing in lock step with U.S. rates. The Bank of Canada has now confirmed this trend reversal by moving Canadian short-term interest rates slightly higher. The trend of interest rates in Canada is up.

Long-term trend is up

The long-term trend of the US dollar vs. the basket of non-US currencies has been up since the financial crisis of 2009. Since early 2015 the up trend has slowed to a snail’s pace, but it has stayed intact. Immediately following the American election last year, the USD rose 6 per cent. But since January of this year, it has dropped, and is now 4 per cent lower than 9 months ago. The long-term trend is still up, but barely up.

The Canadian dollar versus US dollar is getting interesting now. Following a multi-year down trend, our last article noted that the loonie had been strong even though oil prices had been weak. The Canadian dollar was no longer a petro-currency. That short-term up trend has become so strong that it has now confirmed a long-term trend reversal. It is now safe to say the loonie is in a long-term up trend that began in January 2016.

Gold remains in a long-term uptrend, though a weak one. It is interesting that gold stocks, on average, are not in a long-term uptrend even though gold itself is. We have been recommending junior gold mining stocks for speculators, but encourage trading only in those individual stocks that are in up trends. This is an updated list of junior Canadian gold mining stocks that are in multi-year up trends: Detour Gold Corp (TSX—DGC), NovaGold Resources (TSX—NG), OceanaGold (TSX—OCG), Semafo Inc. (TSX—SMF) and SSR Mining (TSX—SSRM; NASDAQ—SSRM).

Oil prices remain in a long-term uptrend following the February 2016 low. It is interesting to note that oil prices have been weak so far in 2017 and that, on average, energy stocks have been even weaker. This is an indication that large investors like mutual funds and pension funds had not reduced their overall holdings of energy stocks as much as they had wanted. These mega-investors like to keep the percentage of oil stocks in their portfolios more or less in line with the percentage of oil stocks in the stock market averages. The strategy is called ‘indexing’, and insures that the performance of large equity pools is more or less in line with the overall stock market averages. When we see a time (like the past 8 months) when a sector under performs (like the energy sector), it is because the mega-investors are still reducing their exposure to that sector. One of the reasons the Canadian stock market has underperformed the US stock market is that there are so many energy stocks in the TSX Composite Index. Those energy stocks are like an anchor holding the Canadian market down.

The trick in managing our portfolio is not to analyze the news. The media reports whatever news it feels like reporting. We need to analyze the financial trends.

Are we at the top?

Question: When we review financial trends, what are we looking for?

Answer: In our stock market book, Beyond the Bull, we discussed the sequence of economic trend reversals that accompany stock market tops and bottoms. Obviously, at bottoms we want to be fully invested in the stock market and at tops, we want to be out.  But since no form of analysis is 100 per cent accurate, we need a strategic investment plan that reacts to changes in financial trends—a plan that tells us when we should buy and when we should sell. When we review financial markets, we are looking for reasons to adjust our investments.

Because the US stock market has been going up since March 2009, we are looking for signs of a top. After the market has gone down for a year or two, we will look for a bottom. This is the topping sequence. First, interest rates bottom. (We are measuring the trend of 20-year+ government bonds here, not short term T-bill rates.) Second, the stock market reverses from an up trend to a down trend. Third, the economy weakens and a recession/depression sets in.

US interest rates bottomed in July 2016, just over a year ago. The US stock market is still going up and the economy is still strong. Whenever the US stock market turns down, all other stock markets turn down too. The S&P500 is a bellwether for world stock markets.

Critics claim that my system, dubbed ‘The Countercyclical Model’, has predicted 7 of the last 4 bear markets. Their criticism is valid: My advice to investors has always been ‘safety first’.


This is an old bull market, much closer to its end than to its beginning. One of its chief features is the presence of massive government economic stimulation, especially in the United States. An equally important feature of the Canadian economy is the speculative real estate bubble. Both of these excesses will end as interest rates continue to climb.

Stock market investors should continue to own equity portfolios for now. If the S&P500 Index drops 7.2 per cent from its August high, sell some of your stocks. That’s a close of about 2310 or lower, which will probably occur in September.

Ken Norquay, CMT, is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: behavioural finance.

This is an edited version of an article that was originally published for subscribers in the August 2017/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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