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The bull market that started in March 2009 could continue as company valuations and monetary policy indicators remain neutral and sentiment remains bullish. However, technical indicators show that the bull market’s end may be around the corner.
The bull market that began in March 2009 is running into its fourth year and could continue, according to a recent Financial Times article. The Dow Jones Industrial Average (INDEXDJX:.DJI) is up 71 percent since March 20, 2009. The S&P/TSX Composite index (TSX:OSPTX) has risen 36 percent and S&P 500 index (INDEXSP:.INX) has also surged 71 percent since March 2009.
While market levels are at their highest in four years, share volumes are at their lowest in the same time. The global economic picture, while still bleak, is slowly improving. At such times, investors want to know if market indicators show that the bull market is here to stay or could be gone quickly.
Mark Hulbert, editor of The Hulbert Financial Digest, said that of the four indicators that determine if the top of a bull market has been reached, two are currently no worse than bullish, one is outright bullish, and only one is bearish.
New bull market highs ahead
“[I]t would certainly appear as though the better bet is that new bull market highs are still ahead,” Hulbert commented. Company valuations are no worse than neutral, he said, adding that the current price to earnings ratio for the S&P 500, based on trailing twelve-month earnings, is 14.9, which compares to a 140-year average of 15.5.
Technical performance is the most negative, he said, explaning that short-term technical indicators are bearish. However, that’s nothing to worry about as technical indicators do not signal an imminent bear market.
The monetary policy indicator is not worse than neutral. “Most past bear markets have begun when monetary conditions were unfavorable,” he said. “That’s not the case today, with interest rates at historic lows and the Fed signalling that it most likely won’t begin increasing rates until 2014.”
Sentiment indicators bullish
In terms of sentiment, all indicators are “outright bullish,” Hulbert said.
While a top in this four-year bull market may still be coming, investors worry about the market as seen in the nearly six percent fall in the S&P 500 and the Dow Jones in the past month.
“I believe the fear gripping stock markets is due to unknowns,” said Elliott Morss, an analyst and the head of Morss Global Finance. “When I look carefully at the unknowns, I see the markets as oversold. Sure, the US recovery is fragile, but it is moving in the right direction. The Eurozone? A real disaster in the making. But contagion fears are way overblown.”
He added, “[p]anic is more often than not ill-founded, based on an incorrect assessment of the future. … Virtually every indicator suggests the US economy is recovering. Slowly, yes, and hirings are lagging, and the real estate cycle has not turned up. But still, there is progress.”
Technical indicators show bull market end
Christopher Ebert, who uses his engineering background to mix and match options as a means of preserving portfolio wealth, said earlier this month that the Long Call/Married Put Index (LCMPI) “was in danger of reaching a level that would indicate that the current bull market had ended. As of May 10th, the Index had not reached that level, although it was very close.”
The LCMPI measures the strength of a bull market. “When long calls or married puts with terms of 112 days, 28 days, and 7 days all become unprofitable, it is a strong indication that a bull market has ended,” Ebert said. “The LCMPI has not been in negative territory since early December 2011, so a change in the Index would mark a significant change in the sentiment of the market. When emotions change, new price patterns often emerge.”
Leaving technical and economic indicators aside, history shows us that “the S&P 500 has never declined during year three of the presidential cycle,” said Louis Basenese, founder and chief investment strategist at WSD Insider and Wall Street Daily. “Instead, it rallies by an average of 17%.”
Basenese added, “[a]lthough the current bull market surpassed the 700-day mark earlier this month, 11 other bull markets have lasted longer. Much longer. In fact, nine of the 11 prior bull markets lasted for more than 1,300 days. Do the math and it’s possible that we’re only a tad more than halfway through this bull market.”
Securities Disclosure: I, Karan Kumar, hold no direct investment interest in any company mentioned in this article.
