Thursday, March 10, 2011

Don't Expect a Market Correction Anytime This Year or Next

As the two year anniversary of this bull market that started in March 2009 has come and gone, it's time to actually review some of the facts surrounding typical bull markets. From listening to numerous media reports yesterday, its common place for analysts and hosts to spew out information without researching the past.

From this Bloomberg article, numerous real facts about the market were revealed. It's also revealing that alot of the players that called the bottom remain bullish and alot of the cronies that called for a further correction are still bearish. Sometimes it makes you wonder if any of the so called bears had any real insight other then a broken clock is correct twice a day. It also makes me wonder if we'll say the same about the bulls down the road.

Clearly a two year rally without a 20% correction seems impressive and sounds like a very long time. At least thats what you get from the typical media. But is it really all that impressive? According to research, this bull market is only half over. The typical bull market after a recession lasts some 1,407 days while this rally is only 730 days old. Now most rallies tend to fade as they reach the 3rd and 4th years, so its also worth noting that the typical rally sees a gain of 131%. Prior to todays smack down, this rally was approaching 100%, but clearly thats not even close to the average.

One very important concept to grasp when reviewing these typical and average bull markets is too remember how far the market fell and that relation to history. Having one of the worst crashes in history makes the upside potential to likely exceed the average rally length and percentage gain. Also it can clearly be argued that the crash shouldn't have dropped below 800. Using that figure with the typical 131% gain would net the SP500 jumping to new highs of 1,848. Or of course just use the argument that the scope of the drop suggests a 150, 175, or 200% rally.

If those numbers seem excessive, consider that corporate profits are expected to hit a record just below $100 in 2011 and will easily reach into record territory in 2012. Even a typical 7% gain in profits would place 2012 numbers at $107. Hit that with a 15 PE and the market would reach 1,600.

The article makes an interesting point that historical market tops come with PEs above 19. Clearly by the 4th year of a rally investors become too comfortable in corporate profit growth and multiples expand to lofty levels. Then the Fed raises interest rates and we're left with a market trading at high multiples just as the Fed is slamming the brakes. That is not happening now with PEs in the 13 range.

Simple math shows the market would need to hit the much loftier original 1,848 level based on the average market rallies and actually surpass that number to reach the typical PE highs. By the 4th year of this rally, the market would need to surpass 2,000 to reach the 19+ PE.

No guarantee exists that the market will come anywhere close to these questimates. Unrest in the Middle East and North Africa could completely roil the markets with high oil prices. The end of QE2 could cause asset prices to collapse without the Fed supporting them. (At least that is the theory though the Fed still has its foot on the pedal with unreasonably low interest rates)

As the market sinks below 1,300 today, the current selloff has already hit 4%. As the data shows, its highly unlikely to come anywhere close to 20% making 10% the worst case scenario bottom and anything over 5% pushing it. With material stocks like Freeport McMoRan (FCX) and oil servicing firms like Weatherford (WFT) off over 25%, now is the time to start adding back to positions. China might have scaled back copper orders during the Lunar New Year at $4.60/lb but they'll be back buying at $4.16/lb.


Via Bloomberg:


  • Even after almost doubling in 24 months, the S&P 500’s two- year return is about 36 percentage points below the average bull-market gain of 131 percent since 1962, according to data compiled by Bloomberg and Birinyi Associates. The 730-day rally without a decline of 20 percent or more compares with an average duration of 1,407 days, the data show.
  • five straight quarters of U.S. profit growth and the biggest yearly increase since 1988 have held down valuations, data compiled by Bloomberg show. The U.S. benchmark index is trading at 15.5 times reported earnings, compared with the average ratio of 19.7 at bull-market peaks. The S&P 500’s earnings yield, or annual income divided by the index price, is 2.96 percentage points higher than the payout on 10-year Treasuries, the widest gap at the two-year point of any bull market since 1962, the data show.
  • S&P 500 companies will boost earnings by 17 percent during the next 12 months to a record $99.82 a share, according to analyst estimates compiled by Bloomberg. Profits in the MSCI All-Country Index may climb 20 percent, analyst forecasts show.

2 comments:

Stock Tips said...

It was a awe-inspiring post and it has a significant meaning and thanks for sharing the information.Would love to read your next post too......
Thanks
Regards
Stock Tips

Stock Tips said...

It was a awe-inspiring post and it has a significant meaning and thanks for sharing the information.Would love to read your next post too......
Thanks
Regards
Stock Tips