Sunday , 23 July 2017


Stock Market Bull Likely to Continue for Another 2-3 Years – Here’s Why

If you follow the mainstream financial print media, you may have seen that many prominent stockmarketpublications have recently called this stock market a ‘bubble’ and many are waiting for the elusive stock market crash! In our view, however, such bearish ‘bubble’ sentiment is precisely the reason why, in our opinion, the party is likely to continue for at least another 2-3 years.

The above introductory comments are edited excerpts from an article* by Puru Saxena (purusaxena.com) as posted on goldseek.com under the title The most hated bull.

The following article is presented courtesy of Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!),  and www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.

Saxena goes on to say in further edited excerpts:

BIG PICTURE – The ongoing bull market is over 5 years old and both the Dow Jones Industrial Average and the S&P500 Index have climbed to record highs yet…despite the fact that this primary uptrend has tacked on impressive gains, it remains one of the most hated bull markets in recorded history...

Bearish sentiment aside, the truth is that this is one of the most powerful bull markets ever, and in our opinion, the party is likely to continue for at least another 2-3 years. Undoubtedly, this primary uptrend has been powered by the Federal Reserve’s unprecedented monetary policy and it is conceivable that the bull run may continue until the inversion of the yield curve.

Today, central banks are accommodative throughout the developed world and as Figure 1 below confirms, the US yield curve is steep (long term rates are higher than short term rates). Furthermore, it is notable that over the past several decades, prolonged bear markets in stocks have always been preceded by the inversion of the yield curve so, unless this time is different, it is probable that the ongoing bull market in common stocks will also end after the inversion of the yield curve; which will be followed by the next economic recession. 

Figure 1: US Yield Curve is steep

puru 1Source: Bloomberg

If our assessment is correct, the yield curve will not invert for at least another 2-3 years and this implies that stocks should continue to appreciate over this time frame. Although we do not possess a crystal ball, we suspect that at the very earliest, the Federal Reserve will start raising the Fed Funds Rate by next summer. Thereafter, the Fed Funds Rate will probably be increased in baby steps (25bps) and the rate hiking cycle could continue for 2-3 years. Under this scenario, stocks may continue to rally until mid-2017, so we recommend full exposure to equities.

In addition to the monetary backdrop, the various technical indicators we follow also remain supportive of this bull market. For instance,

  • the NYSE Advance/Decline Line has now climbed to a record high,
  • approximately 76% of the NYSE stocks are trading above the 200-day moving average,
  • the number of 52-week highs is significantly greater than the number of 52-week lows and, more importantly, after a brief pullback to the 200-day moving average,
  • the (technology-heavy) NASDAQ Composite has now climbed to a multi-year high (Figure 2).
  • Joining the bull parade is the Russell 2000 Growth Index, which has also completed its multi-week pullback and is now trending in the right direction.

Figure 2: NASDAQ Composite (daily chart)

puru2Source: www.stockcharts.com

Bulls should take comfort from the fact that the growth stocks and technology counters are now participating in this stock market rally and over the past few weeks, they have outperformed the broad market. The favourable price action in these ‘risky’ stocks suggests that we are amidst a healthy stock market environment.

In terms of specific sectors, we see strength in:

  • banks,
  • consumer staples,
  • energy,
  • healthcare,
  • industrials,
  • technology and
  • transportation stocks.

Accordingly, we have concentrated our equity and fund portfolios in these areas.Since we are now in a mature bull market we believe that:

  • energy (upstream, integrated and pipelines), industrials and transportation stocks will probably outperform the broad market over the following months; therefore, we recommend reasonable exposure to these sectors of the economy,
  • the semiconductor sector, having only recently broken out of a massive multi-year trading range suggests thaat, therefore, new buying can be done in these securities,
  • the farm equipment and heavy construction stocks are getting ready for a large advance, so some of the prominent names in this industry group may be worthy of your investment dollars.

As far as geographical exposure is concerned, we like the developed world (Europe, Japan and the U.S.) and believe that it will continue to fare better than the emerging nations…

Going forward, we suspect that some of the beaten-down European nations will provide outsized returns and even Japan may surprise to the upside.

If you review Figure 3 below, you will note that during this lengthy consolidation phase, the Tokyo Nikkei Average has climbed back above the key moving averages and the stage may now be set for a tradable advance. Remember, Japan’s policymakers are doing everything to revive the economy and if they succeed in devaluing the Yen further, the stock market will probably embark on an explosive rally.

Figure 3: Tokyo Nikkei Average (daily chart)

puru3

Source: www.stockcharts.com

Over in Asia, although the vast majority of the stock markets are caught in a trading range, there are a couple of interesting opportunities.

  • India’s stock market, after a 6-year trading range, has only recently broken out of its consolidation pattern and it is probable that this uptrend will now continue for several months. Accordingly, we have allocated some capital to this area.
  • Taiwan’s stock market is showing signs of strength and a close above the 2007-high will be extremely bullish. For now, we are watching the developments from the sidelines but if the old highs are taken out, we may allocate some capital.

In summary, despite what you may hear on the mainstream financial media, the bull market is alive and healthy. Furthermore, bearing in mind the monetary backdrop, common stocks in our preferred areas should continue to do well for another 2-3 years.

COMMODITIES – There can be no doubt that the commodities boom (primarily due to two factors – US Dollar depreciation and China’s insatiable demand) ended in April 2011 and we are now in a secular downtrend (bear market).

Between 2001 and 2008, the US Dollar declined relentlessly and since commodities are priced in greenbacks, their values automatically appreciated. Furthermore, between 2003 and 2008, the world experienced its first truly global boom which caused the demand for commodities to surge; at a time when supply was relatively tight! Thereafter, during the global financial crisis, the demand for commodities temporarily plunged; thereby triggering a panic sell-off in the sector.

In response to the global financial crisis, the Chinese authorities unleashed a massive stimulus program and this debt-fueled infrastructure boom caused the prices of commodities to soar for another 2 years. Eventually, the Reuters-CRB (CCI) Index topped out in April 2011 and since then, it has been drifting lower.

If you review Figure 4, you will observe that ever since topping out in 2011, the CCI has been in a downtrend and each subsequent rally attempt has failed beneath the previous high (blue arrows). Such price action is typical of a primary downtrend; whereby the path of least resistance is down.

Figure 4: Reuters-CRB Index (weekly chart)

puru4

 Source: www.stockcharts.com

Currently, the CCI is trading just above the 40-week moving average and it will be interesting to see whether it will hold above this key level. If the CCI can stay above this moving average and then take out its recent high, it will open up the possibility of additional gains. Until then, the path of least resistance is down and traders should either be short or out of this sector…

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://news.goldseek.com/GoldSeek/1405087865.php – © GoldSeek.com, Gold Seek LLC (Copyright © 2005-2014 Puru Saxena Limited. All rights reserved. Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com.)

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