Signs of late stage Bull Market

[Gizmo]

A very smart guy.

http://www.hussman.net/wmc/wmc050801.htm
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Gizmo

[HenryTo]

Bill,

From my perspective, let's just say that not everyone is as good of a stockpicker (or necessarily looking for the same stocks) as you are - and leave it at that.

Best,

Henry

[nodoodahs]

I would say that I hate to be a contrary voice - but that just ain't true.

Earlier today, there were 130 stocks listed on NYSE that have PE<=12, forward PE <=12, NI, OCF, and FCF >0.

Granted, some of them are cheaply priced bad companies that just happen to have had TTM profits, and some of them (F, CFC) I wouldn't touch with a ten foot pole. However, I am reasonably sure that some of them are neither overvalued nor overbought.

Discussion of the "market" has (at least) two problems. First, what IS the "market?" Second, what if one buys stocks, and not the "market?"

Second question first: to some extent, barring major financial meltdown, I posit that what the "market" does is irrelevant to what my 10-20 long positions do. If I pick poorly, we could be in the mother of all rallies and it matters naught. If I pick well, I could have multiple 2-baggers over a bear like 2000-2003 whilst those with index funds are cursing their 401(k)s.

Dow Theory suggests that DJI and DJT are indicative of overall moves. I typically use the S&P500 as my proxy for the "market." I am not sure that either is correct. One could use the SuperComposite or the NYSE composite, or any number of other measures. It depends upon what one is measuring ...

If the intent is to get a sum total of money flows in and out, then obviously you want a market-cap weighted index that includes as many stocks as possible. However, if I want to measure the performance of my stocks vs. the performance of all the stocks that I could have bought, I would want an equal-weighted index of all stocks listed on the NYSE. The basis for comparison must be established before the "market" definition is chosen.

Concerning the DJI, last I checked, and it's been about a year, these are some distributions.

Mkt Cap:
DJI = Nasdaq = 1/3 of S&P500
DJI = 0.31 * DJ Total Market Index
Top 5 DJI = 0.32 of DJI
Bottom 6 DJI = .102 of DJI

So the PG, IBM, UTX, MMM, and CAT of the world represent less than 10% of the total market cap of either the S&P500 or the DJ total market index, but make up almost a third of the DJI. A sudden 10% decline in any of those would drop the DJI by maybe 1/2 a percent (50 points on the Dow), and that one stock's decline could drop the S&P500 index by 1/6 percent (2 points on the index). A "divergence" between DJT, DJI, and S&P500 could really be causd by just 1-3 stocks, assuming that smaller cap issues were doing OK.

So let me ask a hypothetical question to the board.

Would an investor in FNLY, Mkt Cap 115.2mil, really care what happened to the indices? Of course, other than as a benchmark to their own performance? This is not to be taken as any endorsement of FNLY, they just happen to be one of the stocks that have PE<=12, forward PE <=12, NI, OCF, and FCF >0.
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I haven’t seen a beatin’ like that since somebody stuck a banana in my pants and turned a monkey loose.

[HenryTo]

Brian,

There is a possibility that we are in a blowoff stage right now but I don't rate that probability as too high. In order to have such a blowoff rally, the market will need to lure a significant amount of retail investors in the market. Usually, this is done in the following way.

Market corrects in a huge way - ususally triggered by the fear that the bull market is nearly over. Shorts piled down into the most speculative stocks.

The market then reverses. Nimble shorts cover their short positions but the majority of shorts are caught the wrong way thinking that the market will continue to go down. Positive news (possibly earnings, etc.) start coming in. Retail investors see this rise and are now kicking themselves for selling their stocks in the first place. They reversed their bearish positions and now start buying. The public - seeing an ever rising market - will also pile in.

That is, in order to have a blowoff rally, we need an extremely oversold situation in the first place. Did April 15, 2005 mark the bottom of bullish sentiment? Judging by fund inflows and sentiment, I would say "no." If this is a blowoff rally, then it shouldn't last too long. For now, I prefer to sit most of this out unless you can find stocks that you really like.

Ultimately, our goal is just to make money - if one chooses to buy here - into an overbought market with unfavorable valuations (judging by P/E ratios) one is most likely not to make out of his or her positions whole. Better to take it one day at a time and not worry about definitions.

Best,

Henry

[brianchapman]

Henry,

A couple commentaries back you mentioned that you didn't think the current rally was really the "blowoff" stage of this cyclical bull - do you still think that is the case? If so, why? If not, why not? (I know those two questions could be the subject of an entire writeup...) Again, thanks for all the great information posted on this site!!

Thanks, Brian

[HenryTo]

Nice analysis - thanks for posting that Gizmo. I read Hussman's commentary once in awhile but don't follow it on a weekly basis.

His latest commentary jives with the Dow Theory (currently) in that neither the Dow Industrials nor the Dow Transports had confirmed the latest upside moves in the S&P 600 or S&P 400. Note that our "brand name watching" articles have also been telling the same story - with the recent stock price action of companies such as KO, MSFT, IBM, GE, and INTC severely lagging the recent performance of the S&P 500.

Also note that the October 1966 to December 1968 cyclical bull market (within the October 1966 to December 1974 secular bear market) also ended with a huge blowoff of small caps stocks - said blowoff which was not confirmed by the Dow Industrials nor the Dow Transports. It is interesting to note that towards the end of 1968, the majority of investors was also calling Dow Industrials an antiquated and irrelevant index - similar to what investors are also doing today.