"The bull market." (Ironic that that's what we call it, isn't
it?)
Will the bull market continue through 2010?
Possibly. But don't expect a straight move up like we've seen in the popular indices.
What USUALLY happens when a bull market gets started?
All but one of the 14 previous bull markets since 1932 survived into a second year. They then averaged 12.5 percent gains during that year.
But that doesn't mean in 2010 the market will move in a straight line up.
And it doesn't even mean we will definitely advance at all.
But I want you to know, as you navigate your way through the next year, what cards are in the deck.
(This week I'm giving you the "bull side" of the argument for 2010. You may remember an article I wrote two weeks ago, however, where I talked about some serious potential bearish pitfalls that are in the cards. We keep the different situations in mind, because it's important to understand the different possible outcomes. But we trade based on what's going on AT THE TIME.)
Advance or Sell-off? 'Correct!'
There is a LOT of cash still on the sidelines and the return you get on that cash, like in a money market account, is close to nothing.
But it's not exactly scared money like it used to be. "Envious money" is more like it.
Most individual investors didn't participate in the rally off of the March low. It's been a low-volume rally, mainly in larger companies.
You may recall a report from Morningstar I mentioned a couple of months ago saying that, for the first eight months of the year, out of the top 10 funds that saw the largest inflows of capital, nine of them were BOND funds. This shows the lack of participation from individuals.
At the March 2009 bottom, money fund balances peaked at $3.7 trillion. JPMorgan (Symbol: JPM) said that since the March bottom, $560 billion has flowed out of money funds, leaving $3.2 trillion still in money markets.
So, that leads us to believe there is a LOT of potential for money to come flowing back into the stock market after a correction. Or, at least, it will likely move into one of the financial markets.
But, why do I point to the stock market today?
To further back up the idea that so many investors are waiting for a correction before jumping in, I'll point out that Investors Intelligence polls over 200 financial newsletter writers and investment advisers on whether they are bullish, bearish or looking for a correction.
The recent poll shows advisers who identified with "looking for a correction" increased to 35.1%, the second-consecutive week with their highest number since March 1992 when they were at 35.3%.
What about liquid assets in other than money markets? There are other cash or "cash-like" stockpiles out there like cash deposits, CDs, etc. The U.S. household sector currently has approximately $7.7 trillion in liquid assets, which is even higher than the previous peak in the 1980s.
With all that cash on the sidelines, what the heck is everyone waiting for?
And how has the market moved so much higher off the March low with all that cash on the sidelines?
Two weeks ago I explained why and, more importantly, how the Fed is manipulating the equities market higher. Or, at least I explained ONE way that few people know about. (Check it out if you didn't read it).
I also told you the Fed is juggling between keeping the Treasury market and the equity market afloat (read: manipulation) at the same time. This is as dangerous and possibly as difficult as juggling knives with the handles on fire.
I didn't explain this "behind the scenes" situation for the purpose of suggesting you start trading off of that info right now. It's part of the story that you should keep in your back pocket, much like the looming credit crisis was "in the cards" when we wrote about it through the end of 2006 and in early 2007.
The reason why I explained the way the Fed props up the equity (and bond) markets was because you need to understand a large part of what's been keeping the major indices (and, therefore, market sentiment) propped up.
And once you get that, you start to understand how to detect when that trend may be ending, failing or just taking a breather.
But it's too early to act on that knowledge, and too early to "position yourself" based on that knowledge.
One of the biggest mistakes investors make is positioning themselves based on a compelling story, before it's in motion and starts to play out.
(Imagine if we got really bearish in late 2006. ... We waited until we saw institutions starting to sell out of the Wall Street stocks, and then we went to town booking bearish profits.)
So, what "advice" can I give you right now on how to understand the market and the strength behind it?
Well, I can give you a very basic but very powerful concept that you MUST understand, when deciding when to invest, and where to invest.
Size Does Matter
This year, if you don't do this already, I want you to stop focusing on the Dow Industrials.
And if you are going to focus on the S&P 500 (large-cap index), then you have to also focus on the S&P 400 (mid-cap index), and the S&P 600 (small-cap index).
Why? Because there are a heck of a lot more smaller companies than there are large-cap companies.
So let's take a look at the difference lately.
Since the high we reached in mid-September, the large-cap stocks advanced 3.9%, the mid-cap stocks advanced 1.6% and small-cap stocks actually declined (even with the recent advance) by 1%.
Clearly, the small-cap stocks have been moving out-of-favor. But that's not necessarily a bearish sign.
Don't confuse small-cap stocks with market breadth. That's another story.
(However, breadth is, in fact, weak.)
Let's continue...
Again, there are more smaller stocks than there are bigger stocks. So, if you threw a dart at a board, it's more likely that you landed on a stock that moved a bit lower -- or that traded flat, at best -- than landed on a winner.
Here's how the market is broken down and how you should always view the market:
I will continue to bring you the big bullish and bearish arguments. Like I said, you must understand the stories that may develop (in the public eye) and why.
But the best way to trade, in my opinion (if you're interested) is to move based on what the market is doing currently and to focus on what sectors of the market are seeing institutional accumulation or distribution (which can be found at Sector Hunter, and learned through ETF Master Trader).
To significantly minimize risk without giving up profits, use option contracts! It's by far the smartest way to trade.
This way, if you wake up one morning and some disaster caused the market to trade down 20% when you're bullish, or a huge event causes a huge bull run when you're bearish, your loss will be MINIMAL, and you can reconsider your market stance.
Understanding the market for what it is (i.e., a number of smaller groups of stocks, as opposed to a bunch of similar stocks all represented in one index), and not what the media has programmed you to think it is, is the first and most-important step.
I hope I've started some of you on the right path of segmenting the market into many different parts.
Will the bull market continue through 2010?
Possibly. But don't expect a straight move up like we've seen in the popular indices.
What USUALLY happens when a bull market gets started?
All but one of the 14 previous bull markets since 1932 survived into a second year. They then averaged 12.5 percent gains during that year.
But that doesn't mean in 2010 the market will move in a straight line up.
And it doesn't even mean we will definitely advance at all.
But I want you to know, as you navigate your way through the next year, what cards are in the deck.
(This week I'm giving you the "bull side" of the argument for 2010. You may remember an article I wrote two weeks ago, however, where I talked about some serious potential bearish pitfalls that are in the cards. We keep the different situations in mind, because it's important to understand the different possible outcomes. But we trade based on what's going on AT THE TIME.)
Advance or Sell-off? 'Correct!'
There is a LOT of cash still on the sidelines and the return you get on that cash, like in a money market account, is close to nothing.
But it's not exactly scared money like it used to be. "Envious money" is more like it.
Most individual investors didn't participate in the rally off of the March low. It's been a low-volume rally, mainly in larger companies.
You may recall a report from Morningstar I mentioned a couple of months ago saying that, for the first eight months of the year, out of the top 10 funds that saw the largest inflows of capital, nine of them were BOND funds. This shows the lack of participation from individuals.
At the March 2009 bottom, money fund balances peaked at $3.7 trillion. JPMorgan (Symbol: JPM) said that since the March bottom, $560 billion has flowed out of money funds, leaving $3.2 trillion still in money markets.
So, that leads us to believe there is a LOT of potential for money to come flowing back into the stock market after a correction. Or, at least, it will likely move into one of the financial markets.
But, why do I point to the stock market today?
To further back up the idea that so many investors are waiting for a correction before jumping in, I'll point out that Investors Intelligence polls over 200 financial newsletter writers and investment advisers on whether they are bullish, bearish or looking for a correction.
The recent poll shows advisers who identified with "looking for a correction" increased to 35.1%, the second-consecutive week with their highest number since March 1992 when they were at 35.3%.
What about liquid assets in other than money markets? There are other cash or "cash-like" stockpiles out there like cash deposits, CDs, etc. The U.S. household sector currently has approximately $7.7 trillion in liquid assets, which is even higher than the previous peak in the 1980s.
With all that cash on the sidelines, what the heck is everyone waiting for?
And how has the market moved so much higher off the March low with all that cash on the sidelines?
Two weeks ago I explained why and, more importantly, how the Fed is manipulating the equities market higher. Or, at least I explained ONE way that few people know about. (Check it out if you didn't read it).
I also told you the Fed is juggling between keeping the Treasury market and the equity market afloat (read: manipulation) at the same time. This is as dangerous and possibly as difficult as juggling knives with the handles on fire.
I didn't explain this "behind the scenes" situation for the purpose of suggesting you start trading off of that info right now. It's part of the story that you should keep in your back pocket, much like the looming credit crisis was "in the cards" when we wrote about it through the end of 2006 and in early 2007.
The reason why I explained the way the Fed props up the equity (and bond) markets was because you need to understand a large part of what's been keeping the major indices (and, therefore, market sentiment) propped up.
And once you get that, you start to understand how to detect when that trend may be ending, failing or just taking a breather.
But it's too early to act on that knowledge, and too early to "position yourself" based on that knowledge.
One of the biggest mistakes investors make is positioning themselves based on a compelling story, before it's in motion and starts to play out.
(Imagine if we got really bearish in late 2006. ... We waited until we saw institutions starting to sell out of the Wall Street stocks, and then we went to town booking bearish profits.)
(click on the chart to view it full-size)
So, what "advice" can I give you right now on how to understand the market and the strength behind it?
Well, I can give you a very basic but very powerful concept that you MUST understand, when deciding when to invest, and where to invest.
Size Does Matter
This year, if you don't do this already, I want you to stop focusing on the Dow Industrials.
And if you are going to focus on the S&P 500 (large-cap index), then you have to also focus on the S&P 400 (mid-cap index), and the S&P 600 (small-cap index).
Why? Because there are a heck of a lot more smaller companies than there are large-cap companies.
So let's take a look at the difference lately.
Since the high we reached in mid-September, the large-cap stocks advanced 3.9%, the mid-cap stocks advanced 1.6% and small-cap stocks actually declined (even with the recent advance) by 1%.
Clearly, the small-cap stocks have been moving out-of-favor. But that's not necessarily a bearish sign.
Don't confuse small-cap stocks with market breadth. That's another story.
(However, breadth is, in fact, weak.)
Let's continue...
(click on the charts to view them full-size)
You might also notice something else. The drawdown
since the mid-September high is bigger on the mid-cap index (7.6%)
than on the large-cap index (4.7%), and the small-cap index
drawdown since the September high is even bigger
(9.5%). Again, there are more smaller stocks than there are bigger stocks. So, if you threw a dart at a board, it's more likely that you landed on a stock that moved a bit lower -- or that traded flat, at best -- than landed on a winner.
Here's how the market is broken down and how you should always view the market:
- Large-cap stocks: $10 billion–$200 billion
- Mid-cap stocks: $2 billion–$10 billion
- Small-cap stocks: $300 million–$2 billion
- Micro-cap stocks: $50 million-$300 million
- Nano-cap stocks: Below $50 million
I will continue to bring you the big bullish and bearish arguments. Like I said, you must understand the stories that may develop (in the public eye) and why.
But the best way to trade, in my opinion (if you're interested) is to move based on what the market is doing currently and to focus on what sectors of the market are seeing institutional accumulation or distribution (which can be found at Sector Hunter, and learned through ETF Master Trader).
To significantly minimize risk without giving up profits, use option contracts! It's by far the smartest way to trade.
This way, if you wake up one morning and some disaster caused the market to trade down 20% when you're bullish, or a huge event causes a huge bull run when you're bearish, your loss will be MINIMAL, and you can reconsider your market stance.
Understanding the market for what it is (i.e., a number of smaller groups of stocks, as opposed to a bunch of similar stocks all represented in one index), and not what the media has programmed you to think it is, is the first and most-important step.
I hope I've started some of you on the right path of segmenting the market into many different parts.
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