Let us talk some more Bull

In a previous posting I noted there is no precise definition of a bull market and so I reasoned that if we could identify a bear market we could resolve the bull market argument. This logic is based on the fact the we can’t have a bull and a bear market operating at the same time. I then defined a bear market to be a major index as measured by the S&P500 or the S&P/TSX60 that posts a new 52-week low within a 26 week window. Our last new 52-week low was posted over a year ago and so with the bear gone, welcome to the 2009 – 2010 bull!

Unfortunately the investors out there who are enjoying the current bull still have to endure the endless stream of doom-and-gloom dribble that is served up by the financial media. Last week I scanned a Globe and Mail item Thursday, Mar. 11 entitled “The bear: Dead or just sleeping?” The contributors were the usual bears who have so far missed the 2009-2010 bull and in desperation try to talk the markets down so they can get on board. Are we are to believe this is a bear market sent temporarily into hibernation because the market “has glossed over the harsh realities that face the markets”? The “harsh realities” are credit bubbles, rising interest rates and possible threat of a double-dip recession that could utterly derail the market recovery.

Ok here is a “harsh reality”, firstly bear markets do not fall asleep or hibernate and the markets always lead the current reality. For example the current reality is a news item “Canadian bank profits top $5B” Tuesday, March 9, 2010 CBC News Total profits for Canada's six biggest banks surged to $5.3 billion in the first quarter as loan losses fell and their domestic operations flourished. Those profits are about 75 per cent higher than they were in the first quarter last year when the world financial meltdown was in full swing. The harsh reality is the bank stocks bottomed a year ago in spite of the “harsh reality” at the time which was a pending total collapse of to-days modern financial system. The markets as usual got it right.

The best way for investors to handle any bull market is to work with the three phases of the bull. The first phase is the non-belief period when the first advance is thought to be a bear market rally. At this time you can buy anything – just throw a dart and get invested. The second phase is the logical period, a period of rising prices along with improving fundamentals – a sign the worst my be over. The third and final phase is the recognition period, a period of recognition the old bear is dead and we do indeed have a new bull market. Sideline cash begins to look for lagging stocks that were forgotten during the logical advance of the second phase

Last week I ran a stock scan or filter seeking stocks that were breaking up out of a 10-week price channel and seeking out overlooked stocks that were “hibernating” or base building. Our chart is the weekly closes of one selection, Sherritt International Corporation (TSX-S) spanning about 100 weeks. I have overlaid the 10-week price channel and some relative analysis work. For a list of selections follow this link: http://www.gettingtechnical.com/04_analysis/01_filters.shtml

If it Looks Like a Bull, and Walks Like a Bull:

As far as I know there is no precise definition of a bull market. Ned Davis Research define a bull market to be: A Bull Market requires a 30% rise in the Dow Jones Industrial Average after 50 calendar days or a 13% rise after 155 calendar days. This is an important benchmark for all market participants because there are still investors and portfolio managers out there who are just now getting invested having missed all of the great 2009 advance. I know of one local portfolio management firm that actually managed to lose money in 2009!

The Ned Davis definition is important but I think an easier way to identify the bull is to firstly identify the bear. So if we can ID the bear then we know the bull because you can’t have both operating at the same time. I would define a bear market to be a market as measured by the S&P500 or the S&P/TSX60 that posts a new 52-week low within a 26 week window.

Our chart is the weekly closes of the S&P500 spanning about 4+ years. We can clearly see the great 2007-2008 bear and the subsequent 2009 – 2010 bull. Of course this is easy with the benefit of hindsight but when you overlay the weekly or intermediate cycle you can clearly ID the bear which flashed a new 52-week low within the 26-week window in Q3 of 2007. The new 52-week lows within the 26-week window persisted until March 2009.

The failure of the bear to post a new 52-week low by late July through early August 2009 signalled an “official” departure of the bear and so with the bear gone – we must have a bull. When we have a bull we get invested pronto – investing is not a spectator sport – you have to participate. It is all well and good to buy-and-hold and know when to sell – but to miss the next bull market is portfolio damage that cannot repaired

When your lost, follow the Bellwether:

A bellwether is an important stock that is a component of a bull market. If the bellwether is healthy, so is the broader market. If the bellwether gets into trouble – run. A bellwether should be a component of a key sector such as the Financial, Industrial or Technology sectors. Rarely do we find bellwethers in the Consumer, Energy, Health Care and Materials sectors

The term bellwether is derived from the Middle English Bellwether which refers to the practice of placing a bell around the neck of a castrated ram - (a wether) in order that this animal might lead its flock of sheep. The sheep in this example would be the investment sheep that tend to follow the shepherd to safety or slaughter. Shepherds can be found in the business dailies and on business television. The problem is the investment sheep have no idea who the good and bad shepherds are and so the best strategy is for the sheep to follow the bellwether.

In the U.S. market one important bellwether is the technology component Cisco Systems, Inc. Cisco is a proxy for to-day’s global technology space and a healthy Cisco is a condition for a bull market in global equities.

Our chart is the weekly closes of Cisco spanning about 8-years. I have overlaid the two important stock cycles – the longer term bull & bear cycle and the shorter term weekly or intermediate cycle. Here is how to read the two. Firstly note the importance of cycle summation which occurs when the longer and shorter cycles are running in the same direction. So when the monthly and the weekly cycles are turned upward we tend to get a big advance and when the longer monthly and the weekly cycles are turned downward we tend to get big declines. The other trick is to count the weekly cycles in a monthly bull (5) and the weekly cycles in a monthly bear (3). So far we are looking good with a monthly up cycle and a pending 2nd weekly up cycle.