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With the Standard & Poor's 500 Index up nearly 70% from the post-financial-crash low it set on March 9, 2009, U.S. stocks on Tuesday recorded their second-strongest showing ever for the first 12 months of a bull market.
But that near-record-setting performance brings to light two key issues.
- First, despite the numbers that stand as evidence of the market's stunning surge, many still-shell-shocked investors refuse to label this as a true "bull market."
- And second, no matter how great a market's performance has been, the real question to answer is "where do we go from here … and how do I position myself to maximize possible returns while mitigating risk as much as possible?"
Money Morning turned to several experts – including Money Morning Chief Investment Strategist Keith Fitz-Gerald, and respected market researcher Bespoke Investment Group LLC – for some perspective on both these topics.
"More than at any other point in market history, the call for skepticism is very real and very justified," Fitz-Gerald said in an interview. "Having said that, I have to repeat a message that we've harped upon time and again here in Money Morning: You can't bury your head in the sand and ignore what's happening. If you did that, you've missed a 60%-plus rally in the S&P since early last March. You cannot fail to acknowledge what's happening" in the markets, even though top traders understand that cheap money from the government bailout – and not a well-rounded economic recovery – is mostly likely behind the torrid run-up in U.S. share prices.
The Bull Market That Wasn't?
As far as the opening round of bull markets go, the 12 months since the nadir of early last March has been a near-record breaker. In fact, Bespoke researchers say the only other stronger first year to a bull market was from March 1935 to March 1936, a 12-month stretch that saw the S&P 500 soar 77%.
And yet, some investors are still refusing to label this as a true bull market.
To answer that challenge, Bespoke researchers also looked at stock market "breadth" to see how strong this rally really has been. Breadth is a technical-analysis tool forecasters use to gauge a rally's sustainability. They look at how many stocks are advancing versus how many are declining, reasoning that a broad-based advance signals a healthy market.
After adjusting for the explosive growth in the number of issues we've seen through the years, Bespoke found that the only other first year of a bull market with stronger breadth was a 12-month stretch from 1942-1943.
In fact, not only was the March 9, 2009 to March 9, 2010 stretch the second-strongest-showing for market breadth in a first-year bull market, Bespoke says the breadth readings for the past 12 months "are among the strongest … we have ever seen for any one-year period."
Since 1928, there have only been three other periods like the present where the average daily breadth reading over a one-year period exceeded 7.5% of all New York Stock Exchange-listed stocks, Bespoke said. Those one-year periods began in February 1943, February 1945 and January 2004.
"In spite of the fact that by multiple measures this bull market has been among [the strongest] – but not quite the strongest – ever, it just never seems to get the recognition it deserves," Bespoke wrote in a research note distributed earlier this week. "As the old saying goes: 'Always a bridesmaid, never a bride'."
What's Next For U.S. Stocks?
This market skepticism is warranted, according to analysts and market pundits.
"The best thing going for the market now is earnings estimates for this year and next are very positive, and there is a lot of skepticism with individuals having been burned badly twice during the past decade," Michael Sheldon, chief market strategist at RDM Financial Group Inc., told MarketWatch.com.
But there are some bright spots.
Take market breadth. In 1943, 1945 and 2004 – the three other years, like this one, in which market breadth exceeded 7.5% of Big Board-listed stocks – stocks posted positive returns in the second year of their bull market, as well as in the first.
"Although the second-year returns were not always as impressive as the initial year … in each of the three periods the S&P 500 was positive in the second year," Bespoke wrote in its research note.
Given the broadness of this advance, the rally that started a year ago could continue into April, since this demonstrates that the market "structure remains bullish," technical analysts at UBS AG (NYSE: UBS) told Bloomberg News.
On Tuesday, the Bloomberg Cumulative Advance-Decline Line for NYSE-listed shares rose to the highest level since May 2008. And that has two Zurich-based analysts for UBS feeling bullish enough about the near-term prospects for U.S. stocks to project a potential advance of as much as 8% by the end of next month.
"The market volume isn't that impressive but as long as market breadth is still that good and sentiment is not at extreme levels we stick to our bullish tactical strategy," Zurich-based Michael Riesner and Marc Muller wrote in a report dated yesterday. "We favor an April top, and still see our final SPX target at between 1,200 and 1,230."
The S&P 500 rose 0.2 percent to a seven-week high of 1,140.45 on Tuesday – the one-year anniversary of the 2009 bear-market low for the broad benchmark for U.S. stocks. The S&P closed yesterday (Wednesday) at 1,145.61.
From that level, a move to 1,230 would represent an advance of 7%.
"On a very short-term basis, the market looks overbought," the analysts wrote. "The likelihood is high to see a consolidation/breather starting later this week [before the rally continues in April]. Continue to buy the dips."
Bespoke researchers found that powerful first-year rallies lead to powerful follow-through. Indeed, back in the first year of the March 1935 to March 1936 bull market – when stocks gained 77% – they went on to gain an additional 31% to take that bull run to its ultimate apex.
Bespoke looked at 12 bull markets with double-digit gains in the first year. Every one of them went on to higher levels.
Money Morning's Fitz-Gerald says the extremely loose monetary policy being engineered by the U.S. Federal Reserve will continue for the foreseeable future. As long as interest rates are at such historically low levels – and there's no indication that the central bank is planning to launch its vaunted "exit strategy" – there's little reason to believe that U.S. stocks prices will head south for any reason except for a temporary correction.
Back in December, Fitz-Gerald called for a market correction of as much as 10%, followed by a rebound that would recoup those losses, and add perhaps another 10% beyond that to the S&P 500.
As he predicted, stocks did correct. And they've scraped their way back. He still believes we could see another near-term correction of 8% to 10%, followed by another rebound that recoups those losses – and then sends the market 10% higher.
"I would not be at all surprised to see a 10% correction here in the near term … after which I think the market will meander higher, absent a change in Fed policy," Fitz-Gerald said. "As long as the Fed continues to decide the bill [for the economic bailout] isn't due, we have no choice but to be long."
Moves to Make Now
Although there is a somewhat-bullish sentiment at play right now, that sentiment is blunted by extreme caution – for several reasons, including spiraling concerns about the strength of the U.S. economic recovery.
Right now, the best offense includes a strong defense, Fitz-Gerald says.
"What you want to do here is to acknowledge reality, and concentrate on sectors that are certain to outperform the broader market," he said. "2010 is the year in which you need to protect your portfolio – rather than going for the home run."
A good place to start is to search out stocks with high – but safe – dividend payouts. Companies with strong global sales – meaning they're not U.S.-centric – are best. Fitz-Gerald recommends investors look for shares of companies involved in infrastructure, power-generation, food and healthcare.
He likes supermarket stocks, and says that energy- and commodity-related stocks should be a part of virtually every investor's portfolio. He counsels investors to stay away from the housing, banking and luxury-goods markets – especially since overspending and debt have been major causes of the financial fiasco the country is now trying to work through.
"We're looking at a $14 trillion fiscal hangover," he said, referring to the fallout from the bailouts and stimulus packages, all of them controversial. "It's clear the hair of the dog is not a good thing in this market."
Look for companies in which "the management team has its act together," and understands the importance of such markets as China, Greater Asia, and many of the other newly emergent markets around the world, Fitz-Gerald says.
"Sin stocks are [also] worth a close look," Fitz-Gerald said. "The reality is that people eat, smoke and drink more when they're upset. It's just a fact of life."
Finally, don't forget to put in place a solid defensive plan, too. Don't concentrate risk, and make sure to employ "trailing stops" on your holdings.
"A year ago, it was easy … a rising tide truly did lift all boats," Fitz-Gerald said. "At this stage of the rally, after a strong and broad advance, all the easy money has been made. Now it's time to concentrate on quality. And it goes without saying that you should have trailing stops in place. In this market, it's all about looking for upside – while at the same time being mindful that there are bear traps all around, even if you don't see the bear."
News and Related Story Links:
U.S. stocks offer muted cheer on bear anniversary.
- Bespoke Investment Group LLC:
Official Web Site.
Stock Market Breadth.
- BusinessWeek.com/Bloomberg News:
S&P 500 to Rally Into April, Breadth Shows: Technical Analysis.
- RDM Financial Group Inc:
Official Web Site.
Trailing Stop Techniques.