When we presented our market forecast in January of this year, we made a strong case for a good first half of the year in stocks, but focused on “increasing headwinds” as we predicted an “end to the current cyclical bull market in stocks late this summer.” The waterfall decline that culminated on August 8 hasn’t yet technically qualified as a bear market, but we came very close. And we’re still well off of the highs set by the bull market run on April 29 of this year.
The recent performance of stocks supports our belief that the market is now following its usual order of business following a waterfall decline as it goes through a bottoming process. This will require tests of the August 8 waterfall lows, just as we saw at the end of last week. While the NASDAQ closed last week at new lows, the S&P 500 and the DJIA did not. And Friday’s retest occurred on reduced downside volume, fewer new lows and less extreme volatility – all positives.
We’re likely to see stocks settle into some sort of trading range for the next few weeks as investors attempt to sort things out. But as we’ve said since the April highs, one of our concerns with the cyclical bull is its duration and percentage gains, both among the highest we’ve historically seen during secular bear markets. As the chart below indicates, the 2009-2011 bull market ranks 4th out of 19 cyclical bull markets witnessed during secular bears. (In both of the below charts, the dates on the horizontal axis represent the beginning of each cyclical bull market.)
The same goes for the percentage gain, again coming in at #4 out of 19, as shown below. With both, we’re assuming that the cyclical bull market that began on March 9, 2009, ended with the current highs of April 29 of this year. If the market should rally to new highs before confirming a new bear market, the current bull would likely become the second longest lasting in history.
For now, we’re content to exert some patience and remain in an underweight position while we look for signs of some direction for stocks. –Stacey Wall