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Is this a Stocks Bull Market?

Stock-Markets / Investing 2009 Jul 27, 2009 - 10:34 AM GMT

By: Michael_Swanson

Stock-Markets

Best Financial Markets Analysis ArticleMy take on the stock market changed last week, because I started to buy and recommend some stocks, something I haven't done in a long time. The economy is still bad and I don't see any signs of a real recovery yet and certainly not a sustainable economic expansion, but it appears that the stock market is just going to keep going higher anyway. I do not need to know why to make money. You make money stock trading in the market by staying aligned with the market trend until the market proves you wrong. And it looks like the overall intermediate-term trend is up.


Being overbought right now doesn't matter.

The stock market is entering a confirmed cyclical bull market. That's a big thing for me to say when I've been calling this a bear market since October 2007 and even during the past few months, but last week changed my views. I'll explain why in a second.

First you have to understand that cyclical bull markets are different than secular bull markets, because they do not lead to all time highs, but are big 8-24 month moves within a secular trading range, like you saw after the bottoms in 1974 and 2002. Once the bull market ends the market averages then go back down towards the secular lows or go into some sort of sideways trading range.

Overall such a market is tough for investors in mutual funds over the long-term, because they end up holding for big losses at times and then just sit there and make their losses back when things turn around only to lose them again. While the typical buy and hold forever guy just spins his wheels money is made either trading the averages or by buying individual stocks outperforming the market averages instead of trying to buy the market as a whole.

I have no idea how long the bull market will last or how high the market will go from here.

What I do know is that it will provide an opportunity to finally make a lot of money in individual stocks in a easier fahsion than we've experienced over the past year and a half and do not worry if you are not long you haven't missed anything, because the money to be made isn't in chasing the market averages higher, but in individual stocks when they line up to go up.

There is only one S&P 500 to buy, one DOW, and one Nasdaq, so yeah if you want to get the ETF's it is easy to "miss out." But with individuals stocks there are literally thousands of ones to choose from and the risk to reward is better in them. With ETF's to make HUGE money you really need to go on margin hence the popularity of the ultra-ETF's, but with individual stocks there is need to margin yourself to make a good return, because when you buy the right ones it is easy to make big gains in them.

In fact you see it happen all of the time. For example one stock I bought last week rallied over 14% on Friday alone. I'm sure you may have a stock you don't own that you wish you bought. Don't worry about individual stocks and missing out, because there is always another one around the corner. Never chase anything.

What I like in particular now are China stocks.

Let's look at the stock market and what has caused me to change my view of it.



In the above chart I've put together my thoughts on the stock market and where they have changed over the past year and a half. In the Fall of 2007 I started to point out all of these signs that we were probably in a bear market. Then in December 2007 I said the bear market was now confirmed by the 150 and 200-day moving averages.

In bear markets these moving averages act as resistance and in bull markets they act as support. However, if the moving averages peak and start to turn down and the market stays below them for more than six weeks then you are in a confirmed bear market. In fact this is my DEFINITION of a bear market - not some fixed percentage the stock market has to go down, but the overall price action of the bear market, which the moving averages make totally clear.

You can turn this around too though - if the moving averages are acting as resistance and then start to flatten out and the market goes above it and stays above it for more than six weeks then you are beginning a bull market during which the moving average will become support.

This is exactly what we have seen happen in the past few weeks. At the March lows I thought the market was oversold and we were going to get a bear market rally that would eventually fizzle out and lead to new lows. Since you want to stay aligned with the big trend to make money and I thought that was still down I tried to short several times only to get stopped out. I also had no fear of being wrong about the market in the sense of "missing out" on a rally, because I know that in a bull market the big money is made in individual sectors and stocks and not the market averages.

When it came to them what I saw by June were lots of sectors that looked like they may have bottomed, but were just going to go sideways for the next several months if that were the case anyway. If the market were really bullish they would provide good entry points then. That's where we are at the moment actually.

By June though after getting stopped out on the short side a few times I started to wonder if I was on the wrong side of things, but still thought even if I was we'd still get a nice correction. The market started June above the 200-day moving average. I said that if it stayed above it for six weeks then the action would be confirmation that all of the people saying we are in a bull market are right. However, if it fell below it and then went into the 800-850 range by early August then they would probably be wrong and we should expect to eventually see the lows of March test or broken in the Fall.

We got one down to the 870 area on the S&P 500 at the start of this month and it looked like the correction could last even longer. But then the market held that support level and rallied straight up to make a new high last week. The strength of that rally last week is what has changed my views from being bearish to seeing this as a cyclical bull market. The S&P 500 has been above its 200-day moving average now for six weeks.

To me this is a confirmation moment just as the price action in December of 2007 confirmed that we were in a bear market this price action confirms that we are in some sort of bull market. Yeah I didn't get in on the March low, but almost everyone who was bullish in March were bullish throughout most of last year two and held all of the way down in fear of "missing out".

Back in 2007 I pointed out how the moving averages were saying we were in a confirmed bear market to people and had dozens of people get angry and give me a list of reasons why this couldn't be so. Some said the Fed would never allow the market to drop. They noted that they were lowering rates like crazy. People on CNBC said we were just in a short-correction. The economy seemed to be fine. I don't want to name names, because this one guy threatens lawsuits against anyone who says anything critical, but one famous name would say it is a bull market and if you sell you'll miss out on everything so a lot of people were simply scared death that if they sold they would miss out on gains.

But the market action is all that mattered then. And it is all that matters now. I'm not going to make the same mistake that the people who denied the bear market did myself right now. Who knows why it is going up - it just is. It could be that the stock market is looking at the coming bottom in real estate prices a year from now and is going up ahead of some positive GDP quarters. It could just be the Fed is printing so much money. Who knows, until the trend is over it is what the cause is. There is simply more money going into stocks than going out.

And you may not know it, but I've wanted to get bullish on the market for a long time. I've been looking forward to going long individual stocks, because a lot more money can be made in them then in playing the ETF's - which had been my primary strategy for making money in the stock market since the bear market started - and is one I am now abandoning.


As long as the market is in a cyclical bull market the money to be made is in individual sectors and individual stocks. We really don't need the market to go up a whole lot to make money in them. It is tough to really tell how high the market may go up or for how long, but my guess is that we'll at least see it go up into the first quarter of 2010 and we could easily see the S&P 500 go into the 1150-1250 by then. 1150 would be a 50% retracement of the high of the Fall 2007 and the March 2009 low after that who knows. In the 1970's the market traded all of the way back up to its secular highs after the 1974 bear market thanks to huge inflation. If we get a ton of inflation in a year or two from now something similar to the 1970's could be in the cards.

Or we could just go up for a year from here and then start a new bear market in a double dip recession as interest rates go up back up.

Truth is you really cannot predict those kinds of things. All you can do is invest along with the overall trend of the market and adapt when it is clear that the overall trend has changed. You don't need to get in or out at exact tops. If you got out of the bear market in December of 2007 you would have saved yourself a lot of money. And the same thing is true here, even though I didn't go long in March on the bottom by adapting to what the market is saying - and is making clear to us - we can still make a lot of money for at least the next year by going long in individual stocks poised to outperform the stock market. Some of them will go up huge.

So this is now an exciting time in the stock market and should be a lot more fun than the past year and a half. Even though I personally made a lot of money last year it is much easier to make money in a bull market in stocks than shorting or market timing.

One thing I recommend you do is a keep a list of the 50 hottest stocks. Then watch those stocks overtime. Figure out why some of them keep going up and others don't. Then you'll understand how to make big money in the market. If you already knows how it works then you know why such a watchlist can make you a lot of money.

Subscribe to my free weekly newsletter for more in depth analysis of the financial markets with a discussion of individual stocks.  To subscribe click here.

By Michael Swanson
WallStreetWindow.com

Mike Swanson is the founder and chief editor of WallStreetWindow. He began investing and trading in 1997 and achieved a return in excess of 800% from 1997 to 2001. In 2002 he won second place in the 2002 Robbins Trading Contest and ran a hedge fund from 2003 to 2006 that generated a return of over 78% for its investors during that time frame. In 2005 out of 3,621 hedge funds tracked by HedgeFund.Net only 35 other funds had a better return that year. Mike holds a Masters Degree in history from the University of Virginia and has a knowledge of the history and political economy of the United States and the world financial markets. Besides writing about financial matters he is also working on a history of the state of Virginia. To subscribe to his free stock market newsletter click here .

Copyright © 2009 Michael Swanson - All Rights Reserved.

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