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INCLINE VILLAGE, Nev. — Our “Expect, But Don't Fear, a Market Pullback” article ran on February 24. Even when you expect them, stock market retreats are frightening because they are always accompanied with bad news. This time the news is especially sour. Commodity prices are soaring, there is upheaval across the Mideast, gasoline is at $4.00 a gallon and heading higher, Japan is a mess, several European countries have serious debt problems and what Libya will look like once the dust settles is anyone's guess. So is the market's retreat just a pullback or a new bear market?
In my new book, “Exchange Traded Profit” (available at Washoe County Library), I highlight the single most effective warning sign of an approaching bear market. Before every major bear market, there is deterioration in market breadth. That is, fewer and fewer stocks participate in the rallies.
As an example, the day of the March 2000 high only 7 percent of the S&P 1500 stocks were within 2 percent of their yearly highs, while 60 percent were already 20 percent or more off their highs. At the October 2007 high there were also more stocks that were 20 percent below their highs than there were within 2 percent of their highs. In both cases, the indexes may have been at a new high, but most stocks had already entered a bear market.
What about now? At the February 18 high 40 percent of the stocks were within 2 percent of their highs while only 11 percent were 20 percent or more off their high. An Advance-Decline Line calculated on the S&P 1500 stocks hit a new high on that day. There were no warning sign of a bear market.
When the market is strong it is easy to expect a pullback. Once the pullback arrives it is also easy to get scared and turn bearish. Easy … and wrong. Buying a pullback in a strong market is a profitable strategy. That's how we view the recent 6.5 percent market drop.
The bull market case remains intact. The economy is recovering, earnings are growing and banks are healthier than they've been in a long time, maybe ever. Short-term rates are near zero, and the effect of the disaster in Japan on world economies will likely keep rates down longer than what otherwise would have been the case. And stock valuations are historically low. There are more positives, but these few are reason enough to explain the bull market.
— Vomund is an Incline Village-based Registered Investment Adviser. Information on his money management service is found at www.ETFportfolios.net or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
In my new book, “Exchange Traded Profit” (available at Washoe County Library), I highlight the single most effective warning sign of an approaching bear market. Before every major bear market, there is deterioration in market breadth. That is, fewer and fewer stocks participate in the rallies.
As an example, the day of the March 2000 high only 7 percent of the S&P 1500 stocks were within 2 percent of their yearly highs, while 60 percent were already 20 percent or more off their highs. At the October 2007 high there were also more stocks that were 20 percent below their highs than there were within 2 percent of their highs. In both cases, the indexes may have been at a new high, but most stocks had already entered a bear market.
What about now? At the February 18 high 40 percent of the stocks were within 2 percent of their highs while only 11 percent were 20 percent or more off their high. An Advance-Decline Line calculated on the S&P 1500 stocks hit a new high on that day. There were no warning sign of a bear market.
When the market is strong it is easy to expect a pullback. Once the pullback arrives it is also easy to get scared and turn bearish. Easy … and wrong. Buying a pullback in a strong market is a profitable strategy. That's how we view the recent 6.5 percent market drop.
The bull market case remains intact. The economy is recovering, earnings are growing and banks are healthier than they've been in a long time, maybe ever. Short-term rates are near zero, and the effect of the disaster in Japan on world economies will likely keep rates down longer than what otherwise would have been the case. And stock valuations are historically low. There are more positives, but these few are reason enough to explain the bull market.
— Vomund is an Incline Village-based Registered Investment Adviser. Information on his money management service is found at www.ETFportfolios.net or by calling 775-832-8555. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
