Cyclical Bull, Secular Bear?
Just as stocks looked like they were going to move to the downside after a consolidation period in June and early July, stocks made a strong advance to the upside last week. On July 13 the S&P 500 advanced 2.5%; one of its strongest days in weeks. The following day the IBD 100 experienced its' fourth straight day of gains, up 1.2%. Big money (institutional investors) showed up on the 15th and pushed volume higher by roughly 40% from the previous day's level on one of the best days of the year for major stock indexes. The upside move by stocks coincides nicely with leading economic indicators produced by ERCI. The growth rate of their Weekly Leading Indicator for the U.S. has been improving for weeks and recently moved into positive territory.
With a major change in market character, this would be a good time to review how different investments are performing. Below I have listed the performance over the last 5 days (as of the close July 20th) of the ETFs currently held in accounts managed by Dightman Capital (see disclosure below).
- AAXJ - Asia Ex. Japan (17.64%)
- FGD - Global Select Dividend (14.66%)
- EEM - Emerging Markets (11.66%)
- BRF - Brazil Small Cap (10.45%)
- HAO - China Small Cap (10.23%
- QTEC - Technology (9.57%)
- DBO - Oil Fund (9.17%)
- QQQQ - Nasdaq 100 (6.55%)
- SPY - S&P 500 (5.58%) Index Reference
Some of these ETFs have been recently added to my strategies and several were added earlier this year. For a more complete look at the performance of our strategies, please review our Composite Performance published on June 30th.
The change in stock market character signals, in my opinion, the potential for a more constructive market environment for stock related investments in the near term. I am still overweight cash in my strategies but could become fully invested very quickly. With the improved action in stock markets combined with an improving economic environment, the likelihood we will move into a bull market increases. What you really need to know is what kind of bull market I am talking about.
I view bull and bear markets as cyclical or secular in nature. A secular market is considered one that is being driven by forces that could be in place for years. Within a secular market you will have cyclical markets associated with the expansion and contraction of the business cycle as well as changes in investor sentiment. It is my opinion the current secular state of the market is bearish. Viewed from a longer time period, broad indexes are trading today at the same level they were in the late 1990's. Stock indexes will need to appreciate considerably from current levels to move into secular bull market status.
Starting in the early 1980's, U.S. investors experienced two decades of a secular bull market with brief cyclical bear markets. This period marked one of the most significant advances in stock market history, which ended in early 2000. Since then the S&P 500 has not been able to advance beyond highs hit in 2000 and has experienced two brutal bear market declines. Within the current secular bear market, evidence is mounting that we started a cyclical bull market back in March. It could transition to a secular bull market but for now we need to use a shorter time frame and treat the current rally as cyclical in nature, in my opinion. Investors face many structural challenges that may prevent our economy from producing a transition from a secular bear to a secular bull market in the near term. I have written about some of these structural challenges in the past and will continue to share my opinion on the subject in the future. I believe keeping an eye on business cycle metrics as well as market price and volume action may prove to be especially helpful in the current environment.
For the moment it looks like stocks are poised to continue generating gains, led by emerging market countries and technology. Below is a chart of sector performance since the start of the consolidation phase (start of June through July 20th) which shows the technology sector leading. This has been true of the broader indexes as well. From the March lows the Nasdaq, with a higher concentration of information technology companies, is up 50% while the S&P is up 40%.
Click on image for full view.
Nobody knows how long this cyclical bull market may last. I do believe I have the tools and processes necessary to monitor market and business cycle activity in an effort to manage my strategies. I am of the mind that we are in a cyclical bull market within a secular bear market. With that in mind, when/if this cyclical bull market ends, there might be prudent defensive action to initiate. If this is a risk management technique you would like applied to your investments, let me know, I would enjoy learing more about your investment management needs.
Disclosure: Strategies managed at Dightman Capital are currently invested in AAXJ, FGD, EEM, BRF, HAO, QTEC, DBO, QQQQ. This is not a complete list of all investments in the strategies managed by Dightman Capital.