Tuesday 2 August 2011

Why Bull Market Could Keep Charging


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    * Short-Term Performance: Market historian John Harris identified nine earlier stock market rallies just like this one. Each one lasted over 120 days, with gains between 25% and 35%, and without a 5% dip. The longest lasted 146 days. In almost every case, though, when the streaks finally ended, the bull market didn’t. On average, in fact, stocks went on to rise another 32%.

    * Intermediate-Term Performance: Based on the past six months, we’ve seen five other times in history when the market has enjoyed a similarly strong rally. In all five instances, it continued to rally for another year. And by as much 37%, according to share tips.

    * Long-Term Performance: Although the current bull market surpassed the 700-day mark earlier this month, 11 other bull markets have lasted longer. Much longer. In fact, nine of the 11 prior bull markets lasted for more than 1,300 days. Do the math and it’s possible that we’re only a tad more than halfway through this bull market.

    * Valuation: Despite the impressive run-up, stocks aren’t grossly overvalued. The S&P 500 trades at a price-to-earnings ratio of 15.7. The long-term average is 15.4 since 1930. Stocks aren’t expensive on a price-to-book ratio (P/B), either. They currently trade at a P/B of 2.2 times, compared to a long-term average of 2.44.

    * Presidential Cycles: The S&P 500 has never declined during year three of the presidential cycle. Instead, it rallies by an average of 17%. So with extra emphasis, we’re thankfully in year three of President Obama’s term.

    * “Smart” Money vs. “Dumb” Money: Institutional investors (i.e. the “smart” guys) are all about this bull market. The monthly Bank of America/Merrill Lynch Global Fund Manager survey registered its most bullish reading in its 10-year history last week. However, everyday investors (i.e. the “dumb” guys) still haven’t bought into the bullishness. Only 37% of their assets are currently invested in stocks, compared to a historical average above 50%. If you want a clear sign of a top, wait until the “dumb” money pushes all their chips into stocks.

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