07/12/2014 Ready for a Genuine Bull Market?

Style Model	Large Value
Sector Model	XLF	0.00%
Large Portfolio	Date	Return	Days
BX	4/14/2014	8.22%	89
TIVO	4/23/2014	10.52%	80
SHOO	4/28/2014	-2.66%	75
PWR	5/12/2014	3.82%	61
PM	5/27/2014	-0.30%	46
SR	6/2/2014	2.78%	40
CFI	6/9/2014	-4.19%	33
FRAN	6/16/2014	-3.20%	26
ESI	6/30/2014	-4.93%	12
NUS	7/7/2014	-4.59%	5
(Since 5/31/2011)
S&P	Annualized	12.98%
Sector Model	Annualized	26.82%
Large Portfolio	Annualized	25.74%

 

Rotation: selling ESI; buying BT.

This trade reflects a preference for Large caps over Small caps on the style model.

The Sector Model switched from Financials, to Utilities, and then back to Financials again on Friday:

 

In terms of both sectors and styles, the market configuration is consistent with the end of a bear market – which has been hidden behind all of the Quantitative Easing.

I don’t show this graph that often, but the highest point on the blue line is the current position in a NORMAL market cycle.  A normal non-QE-market would be bottoming out about now (Bear 4), and the economy would be gearing up for some normal types of business investment (rather than the bubble investing we’ve seen over the past few years).

The curious thing for me going forward is what will happen when we achieve a true bull market configuration just as QE comes to an end. 

My guess is that the market will continue to rise until the Fed actually tries to reverse QE through rising interest rates.  I don’t see that happening yet.  So, the end of QE this year shouldn’t cause the market to fall.  If we truly are at the END of a seven year long bear market configuration, then this would in fact be the correct time to end QE and let natural economic forces do their work.

 In any case, those who focus on normal economic forces have missed most of the “bull market” we’ve experienced – Hussman being a notable example.  And those who focus on QE have been calling for an imminent bear to start at the end of QE this year.

My gut instincts are with both of those camps, and since my gut is almost always wrong, I’ll have to suggest that we won’t see an end to a bull market this year, but instead the beginning of one – that is, the beginning of an actual economically driven bull market instead of a fake QE band-aid market.

HOWEVER, even normal bull markets have to fight the demographic headwinds that underlie secular bears:

From: http://market-mousetrap.blogspot.com/2014/04/04132014-bursting-bernankes-bubble.html

Nothing is exact in secular trends.  They are more like a sledgehammer than a scalpel.  This chart shows a secular bear most likely from 2002-2018.  We all know that it started two years earlier than that.  If it were to also end two years early, that would still be 2016 before we were ready for another Reagan style economy.

Two years more, or four?

Either way, the secular bear isn’t over – which is precisely why we’ve had all that Quantitative Easing these past few years.

So then, if my sector and style models are correct, we are close to beginning a cyclical bull market, in a secular bear.

No reason to panic, but nothing to brag about either.

My suspicion is that we’ll have a boring year between now and next summer. 

Wish I could predict something fancy like a crash – but I’m not in the business of selling news articles.  I’m in the business of personal investing.

Tim