by Jeffrey Saut, Chief Investment Strategist, Raymond James
Everything investors have learned since the last secular bull market.
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I was on a speaking tour last week in Alabama. On Monday I was in Montgomery for a dinner event. Tuesday was a lunch at Birmingham’s Bottega, where legendary restauranteur Frank Stitt was in attendance, while Tuesday night was another dinner event for about 250 people. Wednesday was a lunch in Huntsville and a dinner presentation as the Dow Industrials fell about 300 points. Of course the Bear Boos circled that night with growls of, “I told you this entire rally was only because the Federal Reserve pumped massive liquidity into the economic system.” After reminding those folks earnings have exploded since the 2008 disaster, and that the equity markets do not care about the absolutes of good or bad but only if things are getting better or worse, I related this story from Wall Street icon Ray Devoe titled, “What’s a Bull Market, Dad?” . . . obviously a question surfaced by his son.
Building on John Templeton’s quote, “Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria,” Devoe breaks a secular bull market into six phases (as paraphrased): 1) Aftershock/rebuilding; 2) Guarded optimism; 3) Enthusiasm; 4) Exuberance; 5) Unreality; 6) Cold water (the bubble bursts). Speaking to the first point, every bear market ends with a selling climax (a bang), or a selling dry up (a whimper). March 2009’s bottom was a “bang” with a sharp V-shaped bottom with a subsequent strong rally. A “bang bottom” causes the last bull to capitulate and sell before an anticipated even worse decline ensues. Such a “sold out” condition is followed by an explosive rally. Stage 2 (guarded optimism) is where people do not believe a bottom has been achieved and such “growls” like, “This is only a bear market rally” are heard. At this stage investors that managed the risk, like those that honored the Dow Theory “sell signal” of November 2007, and raised some cash, sell the stocks they bought at the 2009 bottom for a small profit. Phase 3 (Enthusiasm) is where the economy, and general business conditions, begin to improve and it is reflected in higher equity prices. The news gets better and better, which causes more economic expansion, leading to further stock market gains. While I do not have time to go into the remaining stages, I think we are currently in stage 2, “guarded optimism.” If correct, it would fit with my supposition that we have Enthusiasm, Exuberance, and Unreality before the “cold water” arrives. That would also foot with my premise there is likely another eight to nine years left in this secular bull market. And if past is prelude, and the S&P 500 (SPX/2061.02) compounds at its historical “bull run” rate of 16% per year, it yields a target price of more than 4200 for the SPX in 2023 or 2024.
Speaking to “guarded optimism,” while many of the economic reports have missed estimates recently, they are still consistent with a growing economy. Moreover, while earnings may be sketchy during the next two quarters, they too are consistent with a growing economy. As for last Wednesday’s Wilt (-293), it was interesting to listen to the alleged reasons for the Dow Dive (earnings, durable goods, Yemen, etc.) when the real reason was the SEC’s announcement that it wants High Frequency Trading Firms (HFTs) to be registered with FINRA even if all they are doing is trading their own money. Within seconds of that announcement the S&P futures peaked and began a mini-crash. The fall left the SPX below my 2070 – 2075 support zone, but it arrested above the often mentioned 2040 “uncle point.” Failing the 2040 level leaves the SPX’s next downside support at 1980 to 2000.
The call for this week: I spent the weekend in Cooper Tire’s suite, and Roger Penske’s pit, here at St. Petersburg’s Grand Prix. As I watched the race cars, I reflected on the performance derby currently taking place on Wall Street where the pros are trading madly in an attempt to gain alpha (read: outperform). Unfortunately, the SPX is exactly where it was in November of 2014 and has not put together two consecutive up sessions since mid-February. In such an environment the need to be active is a detriment to performance, not a plus! Indeed at times, in the stock market the best strategy is to be inactive, consistent with the mantra, “Sometimes me sits and thinks and sometimes me just sits.” This morning, however, the S&P futures are higher (+9) on hopes China will stimulate its economy and hints there is an Iranian nuclear deal, which has oil prices lower. If the SPX can get back above 2070 – 2075 things will look better, but with a full charge of internal energy the stakes are pretty high between now and next week.
Copyright © Raymond James
