August 1, 2017

How Far Can This Bull Market Run?

The Investment View from Prescott, Arizona

One of the more common questions I get when talking to clients is “How long can this market keep going up?”, or the flip side, “aren’t we overdue for another big decline?”

These comments are often based upon the common misconception that we are more than 8 years from the 2009 end of the 2007-09 bear market and therefore overdue for another since bear markets occur every 5 years on average.

Bear markets are generally defined by a 20% loss before prices begin to recover. If one wants to cherry-pick the statistics they look at, they might be accurate to say that there hasn’t been a 20% drop in this Index or that country since 2009.

However there are many ways to look at “a 20% drop” and most of them show that many segments of the stock markets and many areas of the world did, indeed, experience one or more bear markets since the big 2007-09 bear market.

It is true that in 2011 the S&P 500** Index dropped only 19.39% during the year’s decline, however small company US stock indexes like the Russell 2000 dropped 29%, Worldwide stock indexes like the EAFE index dropped 25% and Emerging Markets dropped 30%.

In 2011 over 70% of S&P 500** stocks dropped over 20% from their highs. The Index might not have been technically in a bear market, but most of its component stocks certainly were.

This kind of distortion is caused by the overweighting of the largest stocks at the top of an index. If you think that the S&P 500** Index includes the same amount of each of the 500 stocks, think again. The largest companies often represent 3% of the Index and smaller companies .01%. Large companies can have 300 times the effect on the index that smaller companies can have.

Ever wonder how Wall Street firms can manipulate markets? By focusing their buying or selling on a handful of larger companies they can steer a headline making index their way. Is it illegal? Probably not. Is it ethical? No. But they still do it all the time, and to keep a bear market from making a headline that will scare away buyers they will do it in a big way.

We had a replay of 2011 again in the twin 2015-2016 stock market declines. The S&P 500** did not drop 20%, although 63% of its component stocks did. But, worldwide markets including Europe, Japan, China and emerging markets did drop over 20%. US small company indexes also dropped over 20%. Was there a bear market then? I guess it depends on where you were invested. If you were lucky enough to have your money in the small number of stocks that did not drop more than 20%, count yourself lucky because there was financial carnage all around you.

So, how long can this bull market continue? The bottom line is that we have had two bear markets since 2009, so this is not the ninth year of this bull market; it may only be the second. If you consider that most of the investment world just emerged from a bear market last year, it would seem that the bull market we are currently enjoying might just have quite a while to run.

 A Mr. Mensa Pageant Report

I had great fun last month at the Mr. Mensa Pageant, the fundraiser for the Mensa Educational Foundation, but I did not come home with the iconic Mr. Mensa sash. Sigh. That would have made a terrific photo op, but alas, I was a runner up instead of the winner.

There were about 500 people packed into the hall for this hilarious event. I did manage to win the formal wear segment with my western cut tux with tails and came in second in the talent portion of the pageant, so I had a good shot at winning considering I was up against men in their 20s, 30s, 40s, and 50s. I really wanted to win one for the old guys. Oh, well. It was still a hoot.

If you want to see what the Mr. Mensa pageant looks like, here are some links to videos of the pageant.

Talent Portion (2.5 minutes)
(The sound comes through best if you have headphones.)
https://www.youtube.com/watch?v=Ew0KczVqeNA

Formal Wear (30 seconds)
(The bag I am carrying held chocolate bars that I used to bribe the judges. Bribery and other forms of tomfoolery are encouraged.)
https://www.youtube.com/watch?v=K72AmvE7XsE

Contestant lineup (30 seconds)
(The grapes I am eating were from hand feeding them to the conference chairwoman a minute earlier.)
https://www.youtube.com/watch?v=9fo59maIbhM

 TCA Online

 There is a new Trust Company of America website that will help you learn more about our primary custodian.

The new website (www.investor.trustamerica.com) explains the role TCA plays in our relationship and the protections they offer as custodian of your assets. You can read about TCA’s history of innovation and safety, which can help you be more confident in your choice to work with us.

There is detailed information about TCA’s regulatory oversight, insurance protection, cyber-security efforts, and more. The site also has a “Go Green” link that enables you to sign up for paperless statements and reports. Please note that you can always call the office for help with processes like moving to paperless reports that can clog your mail box at certain times of the year.

What the Markets Are Doing

Stock markets around the world continued their upward climb after a June pause, with all US indexes showing gains for this month, quarter and year. Small company indexes are lagging the large company indexes, which is a sign of shrinking liquidity, something to keep ones eye on.

My friend Tom McClellan writes the McClellan Market Report, and uses the analogy of the financial markets being like a brood sow, and the cash that allows buyers to buy is like the mother’s milk. The biggest, strongest piggies (large company stocks) get a turn at the teat first and only when they have drunk their fill do the runts (small company stocks) get a turn. When small company stocks lag the broad market it is one sign that liquidity is drying up.

Investors buying into a rising rate bond market to chase higher yields are keeping demand for bonds strong despite the downward pressure on resale prices that rising rates create. Will resale values begin to drop faster than yields produce, wiping out gains bond investors are seeking? Sooner or later, yes. And when they do, bond buyers will be disappointed, but that is not happening yet.

High yield junk bonds have been the strongest segment of the bond market lately, and this portends good things for stocks as junk bonds are a leading indicator for the stock markets.

Gold has been range-bound, moving sideways for the past five months bouncing back and forth between $1,220 and $1,280 several times. Currently gold is on an uptrend, and an upward breakout from its trading range might indicate that the 6-year slide in gold prices is over. A break down out of the range would say that the decline has farther to go. Stay tuned.

Real estate markets seem to be moving two steps forward and then one step back. After housing starts jumped more than 8% last month, existing home sales rolled over. Progress is slow, but consistent, which is good in the face of rising mortgage rates.

What’s Going on In Your Portfolio

The tech-heavy Nasdaq** stock index saw almost a 5% dip in June, and I took the opportunity to trim weaker holdings from my flagship Future Technologies* strategy that makes up 45% of Shock Absorber Growth* portfolios. As a result, Shock Absorber Growth* dipped only 1.48% in June before rebounding strongly.

My “quality of trend” analysis that I have been refining over the past few years continues to highlight top quality growth stocks with big money following them. The effect of big money is reflected in these stocks showing smooth rises as buyers quickly rush in to buy even shallow dips. Those smooth rises are what I refer to as a high quality trend.

Using this analysis I added eleven new stocks to Future Technologies* two weeks ago, companies like Adobe, Applied Materials, Baxter Int’l, Intuitive Surgical, Kemet Technologies, Lam Research, Orasure Technologies, Paypal, STMicroelectronics, Supernus Pharmaceuticals and Take-Two Interactive Software.

Longer term Future Tech* holdings in order of purchase date are:

Flexible Income* portfolios continue to poke along making money slowly, which is what I expect from a conservative, income oriented portfolio like this.

Blended portfolios, Adaptive Growth* (currently 80% SA Growth* and 20% Flex Income*) and Adaptive Balance* (currently 50/50 growth and income) both had good months through this writing on July 30th, driven by gains in the Shock Absorber Growth* side of things.

College Classes

Will is teaching both Fundamentals of Investing for Retirees and Tax Tips for AZ Newcomers (with CPA Jay Lode) beginning Sept 20th.  Stay tuned for details on these classes in the next newsletter..

Mental Floss

If you replace “W” with “T” in “What, Where and When”, you get the answer to each of them.

The word “swims” upside-down is still “swims”.

Our Spotlight Strategy – Future Technologies

With our Future Technologies Strategy strive to provide a high rate of capital appreciation using primarily equity investments in emerging technologies.

We invest primarily in stocks, mutual funds or ETFs, and a money market fund. The proprietary HCM Safety Net suite of indicators is used to warn of potential stock market declines, in which case exposure may be quickly reduced or hedged using inverse funds..

Click here to read more about Future Technologies.