There's been a lot of negative talk lately about the market. First, Obama wanted to proposed a number of reforms to the banking industry, then it seemed Ben Bernanke might not be re-appointed as Federal Reserve Chairman (by the way, he just got re-appointed today), jobless claims and durable goods numbers weren't great, and finally, Steve Jobs showed us a re-sized iPod Touch and called it the iPad. The market responded by droping almost 6% in 7 tradings (S&P 500 closed at 1150 pts. on Jan 19 and only 1085 pts on Jan 28).
What does this mean? Is the bull market over?
Maybe...But Not Likely
Before we begin, let's review what the definition of a bull market is. The most common definition is that a bull market has occurred if the market has risen by more than 20% from the previous bottom. Conversely, a bear market is when the market has fallen more than 20% from the previous top.
As you know already, I like looking at numbers. Let's look at some stats.
- From 1949 to 2008, the average bull market lasted 45 months. The shortest lasted 15 months. We are in our 10th month of the current bull market. So, I would guess there's still some steam left in this bull. I know these are special times...but I'm sure things looked pretty grim during the Korean War, the Vietnam War, the 1973 Oil Crisis, 9/11, etc.
- Ken Fisher noted in his book The Only Three Questions That Count that whenever government deficit hits a high, the stock market is bound to do well. The reverse is also true, that when government deficit declines, the stock market will fare worse. It sounds a little counter-intuitive, but facts don't lie. I have overlaid the graph of S&P 500 (red & green) with the graph of the federal deficit of the US (blue). Obviously, his theory doesn't work all the time, but let's take a look
- 1968 high spending, followed by 1968 stock market peak
- 1969 surplus followed by 1970 bear market
- 1971 peak spending followed by bull market until 1973
- 1974 low spending followed by 1974-1975 market bottom
- sustained high spending in the 80s drove the market a long bull market, as with the 90s
- 2000 peak in surplus followed by 2000-2002 bear market
- 2003-2004 high spending followed by long bull market until 2008
So, we should be happy that the government have spent so much of our money! Sounds kind of backwards, doesn't it? I'm not the expert economist...so why don't you read Fisher's article on this? He actually talks about debt, but deficit essentially tells you the direction that debt is going...so we would arrive at similar results.
- Ken Fisher also notes that bear markets don't occur overnight. It takes a few months for it to happen. Don't believe me? Take a look a our previous bear market. In July 2007, S&P 500 hit around 1550 points. It reached that level again in October, but wasn't able to break through by much (this is called a "double top" in technical analysis language, by the way). Then, the bear market was confirmed in July of 2008 after it dipped 20% below 1550 points (1240 points) in July 2008. Then the market fell off the cliff in September and October of 2008. This was more than 1 year after the peak of the bull market!
What we're seeing now is a correction. Correction usually occurs quickly and typically has some story behind it to make it look real. Don't fall for it.