Despite any neartermed clear and present danger (thank you, Harrison Ford) that I’ve covered in this blog of late, I would like to remind readers that the macro (big picture) view of the stock market is for continuation of the bull market that began in 2013.
On the chart below, you will see the consolidations, marked by the horizontal lines, and bull markets, which are highlighted in pink. I do not consider a breakout from a past consolidation phase as fully confirmed unless the last peak is higher than the prior peaks AND a trough is above the last trough. That, plus the move above the 10 month/40 week/200 day MA (all of which are similar time periods) – depending on whether you are looking at a monthly, weekly or daily chart. I didn’t put MA’s on this chart.
You might wonder why I consider the 2000 – 2013 a consolidation period—when clearly, the Dow Industrial Average (INDU) had put in a new high in 2007. The reason is because the 2008 trough was lower than the prior trough AND (more importantly to me) the peak on the INDU in 2007 was NOT verified by a peak in the broader S&P500 (which was virtually flat).
BTW–I use the INDU chart because it goes back further than the S&P500. Frankly, the S&P500 is a better index to follow, but it doesn’t have the length of history.
I start measuring the bull market from the breakout point after the prior peak was taken out. Most market pundits start measuring a bull market from the trough low – which to me is just an exercise in hindsight. From a practical point of view, we don’t know that a particular trough within a consolidation is the final trough. But we do know when the market makes a high that takes out the last high.
So…Using that rule of thumb, we have the following bull markets since 1900 (see my book SmartBounce if you wish to see the two consolidations and breakouts prior to those noted on this more limited historic chart):
- 1926 – 1930: 4 years
- 1950 – 1966: 16 years
- 1982—2000: 18 years
- 2013- ?
From the above, we might draw the conclusions that – should we follow the length of the shortest bull run since the early 1900’s – this might be the last year of the current bull. However, we might just note that the bull market lengths seem to be getting longer. From 4 years to 16 years to 18 years….perhaps the current bull will last longer than the last bull, which was the 1982-2000 bull market.
Even the most pessimistic amongst us might draw the conclusion that the market has at least many more months to run – and traditional technical analysis might suggest that “the longer the base, the greater the case” for a longer bull market. The consolidation between 1965 to 1981 represented a 16 year sideways market. The breakout in 1982 resulted in a 18 year bull market (to 2000). Because the last consolidation period went from 2000- 2013 (13 years), we might hope to see a bull market trend that lasts for well over a decade. I must admit, I am of the opinion that we have many years to go before this bull market is officially over.
6 Comments
There certainly is a case to be made for higher prices. But what are the fundamentals. This is what Trim tabs has to say. “stock prices are a function of liquidity—the amount of shares available to buy and the amount of money available to buy them—rather than fundamental value. Like the prices of any tradable good, the prices of stocks are driven by supply and demand.” This bull market has a lot to do with share buybacks and financial engineering. When 1 in 5 American families has no one working it is difficult to for me to see this thing going longer based on fundamentals. Obama left Trump a lot of money in the treasury to pay off notes. Trump to my read is more likely to spend, raise debt (reduce liquidity).
As you said Bert–stock prices are a function of liquidity–driven by supply and demand.
In the long run, fundamentals come back to bring valuation in line with historic averages-which can mean upside or downside—If markets are indeed overvalued they will fall–we can watch the charts for that to happen. Start by using my simple rules (lower low, break of a 200 day MA)
Meanwhile–party on!
The party is on. The reality is Trump is not a fan of the monetary policy. If the economy is to get back on its feet there needs to be some serious cap-ex. To me that means not investing in buybacks. If they have to raise money (sell shares instead of buying them) there is serious downside.
Hi Keith,
If oil finally does break above 55.00 and hold, there will be fireworks on the TSX, and the bears will be massacred. I think that in the short and intermediate term, we could be in for a huge pain trade, a rally to 16500 or even higher.
This market has been tricky. I’ll admit that half the time I exited positions, lately, thinking past resistance would apply, stocks soon kept going. This happened to me with PWF and CNR.
But the biggest surprise, especially to fundamentalists, is the rally in Canadian banks. I’m sure all of you recall the very recent doom scenarios. Once again, those who only cared for the charts, held on and are in a great position. I cannot claim I have kept all my bank positions, and regret selling. It’s much much easier to look back and claim that it was a mistake to sell. At the time, many of us participants were glad to see Canadian banks recover.
Not selling… is hard.
Good comment Matt – I’m sure your sentiments echo in this blog’s community of chart watchers. It is hard to follow the discipline. And we make mistakes – we are human.
My simple rule to keep us in a stock we’ve held that may be temporarily consolidating: Weekly chart shows no trough that has broken a prior trough, and the 200 day MA has not broken.
That rule has kept me in GOOGL for some time. I often comment that it is a stock that likes to pause for months at a time-swinging wildly during those periods-but then it breaks out ferociously, so its hard to step out and try timing to get back in at a lower price. Thus, so long as it hasn’t broken my trough and MA rule, I grin and bear it during the semi-painful sideways up/down swings.
Oil hasn’t broken out yet, but my seasonal bias is pushing me to take the leap within the consolidation it seems stuck in at the moment.