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Monday, April 6th, 2009

Is this a new bull market?

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Everyone is asking the same question: is the current rally the start of a new bull market? The fact that everyone is asking means that it probably isn’t. But there are just enough positive signs to be keeping me on edge. (I’ve only been looking closely at the Australian market, though I’ve had a brief look at the US market and these comments probably apply there as well).

Overall the market is showing some positives: volume has been decent, it’s trading above the 50-day MA, the monthly MACD, a longer-term indicator, is showing signs of bottoming and moving to buy mode.

But there are key elements missing: New 52-week highs are not surging. Some stocks are hitting new highs from solid bases, but they are stocks that do well in recessions: one is a company that launches class actions against corporations who have misled shareholders; another runs a string of pawn shops. The market is trading well below the 50-week MA, which is bearish . I’m also not convinced by rallies that are driven by beaten-down sectors, in this case financial and resource stocks.

There are just enough people questioning this rally to suggest the market could still go higher. It’s definitely time for one of those bear-market rallies that go so far that it’s difficult to stay out and convinces everyone that the bull has finally arrived.

At a time like this, when the market shows promising signs, the ultimate arbiter is whether there are aggressive growth stocks with accelerating earnings and sales breaking out of solid bases to new highs. At the moment there aren’t. Basically there’s nothing for me to buy, which makes me question this rally.

From a broader perspective, there is an interesting piece on the excellent Quantifiable Edges’ blog which suggests stock markets could be slopping around for a very long time, as happened in the 1930s. I think this is a very valid scenario. The damage done to the market and the economy is massive. As I’ve said before, a new bull market starts after stocks begin healing and building strong bases to launch big moves. That process is probably starting, but I suspect has a long way to go.

This scenario has serious implications for trend traders. As Quantifiable Edges points out, it was ten years between the market bottom of 1932 and the start of the next secular bull market in 1942. The decade between was punctuated by a series of bull and bear moves, some lasting several months. This scenario has strategic implications. If you are sitting around waiting for a proper bull market to start – as I am – you could be waiting a very, very long time!

This is trader’s market and I suspect it will be for a while yet. The only people making money are the ones nimble enough to ignore the primary trend (bull or bear) and constantly switch. That’s exactly what I don’t do: I’m after big trends in the market and stocks, so I can take a position and ride them for months and years. I want to be bullish in a bull market and bearish in a bear market. But what if we’re actually in a sort-of no-man’s land of neither bull nor bear?

It actually doesn’t take much to tweak my system for it to become more short-term and handle this situation. My system actually does a good job of identifying shorter-term market moves. But, because I’m after bigger trends, I just ignore them if they don’t appear likely to be sustained. The challenge of making the switch is largely psychological. I believe my personality is suited to the system as it is. Maybe I have no choice to adapt and change.

But then again, maybe this is just another case of me finding it difficult to sit out bear-market rallies. Watching the market and stocks suddenly soar and me sitting on the sidelines makes me question my system; a system that has always served me well. This happened last year during the big bear-market rally.

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Word Count: 673. This entry was posted on Monday, April 6th, 2009 at 2:19 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.