Why this is a bull market and not a bear market rally
Even the dips in the market confirm we’re in a full-fledged bull market, insists this U.S. analyst, who also has a Canadian gold stock doing well.
Can the stock market go too high?
Well, markets do tend to bump their heads on the ceiling after they have had a rousing run. Sometimes that bump leads to a serious fall. Other times, it just leads to temporary dizziness.
The dilemma is summed up in a cartoon. It’s from The New Yorker, the supreme practitioner of the business cartoon.
A guy is watching a flat-screen TV. The announcer: “On Wall Street today, the stock market corrected its previous correction, and is pretty sure it’s got it right this time.”
The cartoon appears in the latest issue of The Primary Trend, which believes that we are in a bull market and not just a long bear market rally.
Mr. Barry Arnold publishes this advisory from his investment counselling offices in Milwaukee, Wisconsin. For him, the cartoon offers a clue as to how investors should be approaching this bull market.
This market is really a “stealth bull market” that promises to turn into a long-running bull, he explains. Be ready for the opportunities.
But we’ll pause first to consider the Canadian stock he has in the Special Situation and Turnaround segment of the advisory’s portfolio.
Some corner in gold
Mr. Arnold purchased shares of Barrick Gold (TSX/NYSE-ABX) up to October 30, 2009 at an average cost of $35.90.
Since then, he has held those shares as they have appreciated by over 10 per cent.
With yesterday’s gold stock rally, Barrick’s shares jumped 2.6 per cent. In the past week, they have roared past this editor’s buy limit of $40 and are rallying again today. They trade at $43.46. The stock yields just a little less than 1 per cent on the $0.40 dividend.
The “special situation” here is that even a dedicated bull believes that investors should have some corner of their portfolios in gold. With Barrick, he holds American giant Newmont Mining (NYSE-NEM), which is also rising, sitting at $56.27 and yielding 0.7 per cent on its 40-cent dividend.
Bricks in the wall of worry
When the stock market corrected in January, “the majority of market opinion being bandied about was that stocks were resuming their bear market tendencies,” reports Mr. Arnold.
In fact, he says, it was only the second legitimate buying opportunity since this bull market began 13 months ago.
And now that the market has gone up “in virtually a straight line” since early February, that same majority will claim that the market’s overbought condition guarantees that a correction is right around the corner.
“We suspect that the crowd that is waiting to ‘buy on weakness’ will be the same crowd that backs away as stocks do correct, only to warn that the correction is the start of something worse.”
So these Wall Streeters will sit on the sidelines watching the profits go by. “That suits us just fine, since these are bricks in the wall of worry that this market continues to climb.”
How high is too high?
This is not a bear market rally — it is a full-fledged bull market, Mr. Arnold insists. And it has not been selective. All the major U.S. indices are up anywhere from 45 to 85 per cent over the past year.
So, how high is too high, he asks? This editor is sticking to his targets of a year ago. For the S&P 500 Index, that would be 1150 to 1300, and for the Dow Jones Industrials, 11,000 to 12,000.
He admits that they have already pushed past the “underbelly” of these objectives. The S&P 500 is at 1203 today and the Dow at 11,149. “The fact remains, however, that the equity markets have been stronger and more resilient than we envisioned.”
There are none of the usual red flags. Since the turn of the last century, this market ranks fifth in terms of gains and sixth in terms of longevity without a correction of at least 10 per cent.
The market may still get a breather during first quarter earnings season, he speculates, since expectations are rather high now. But he is betting that a lot of investors who are waiting for price weakness still will not put their money where their mouths are.
Stealth bull market
The Leuthold Group, a research team in Minneapolis, confirms Mr. Arnold’s conviction that, based on historical figures, the recent dips in the market are consistent with the early stages of a bull market cycle
When high-volatility bear markets give way to low-volatility “stealth bull markets,” this group reports, there is “the natural tendency to suspect the new lull is the ‘calm before the storm’.” Mistakenly so, they add.
There is, the editor admits, still a good deal of caution, as evidenced by a net outflow of money from U.S. equity mutual funds. That’s no surprise. As after the crash of 1987, it takes time and rising stock prices to bring many retail investors back into the market.
Volume will pick up as investors embrace this bull market, he promises. Until then it will keep on climbing a wall of worry. When it slides back on its way up the wall, buying opportunities will arise.
Many investors hesitate and miss these opportunities, he repeats, worried that the market will plunge even further.
“But the primary trend of the market is up,” he insists. “Position your portfolio with that in mind.”
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