Why the bull market is back

The old maxim about stock markets is "buy in gloom, sell in boom". Back in 2007, everything was booming, banks were writing huge loan cheques for homeless persons wanting to buy chains of pubs, mansions or whatever and that turned out to be a great time to sell stocks. 

Right now, newspapers are full of gloomy reports on the state of the economy, sentiment is so bad that private investors have been net sellers of shares for five years on the trot, the longest such sequence since records began in 1984. This is despite many companies performing strongly, growing sales and profits while also sitting on significant cash piles.

Yet equities remain cheap. There are exceptions to the rule: Groupon is valued at 40 times last year's sales and has yet to make a profit, but it is growing very fast. Most shares though are modestly valued by past standards. The US Standard & Poors index is on a historic PE of around 12. The FTSE All Share index offers a dividend yield of almost 3.5%, at a time when base rate is 0.5% and 10 year bonds yield 2%.

I have been studying markets, buying and selling shares and playing this crazy equity game in one guise or another for half a century and the last time I saw things looking this good was 1982, the starting line for the greatest bull market in history.

My hunch is that after over 15 years trading sideways shares are so cheap that financial crises and near suicidal gloom in the newspapers are losing their power to drive share prices lower.

The next time the FTSE All Share goes up through 3000 or the Dow Jones through 13,000 I think they are going to keep going with levels like 5000 for the FTSE All Share and 20,000 for the Dow achievable.

The opportunity to buy shares after 15 years of sideways trading, after a decade of gloom and recessions, while company profits are soaring, when shares yield more than bonds and there are trillions in cash waiting on the sidelines - opportunities like this are very rare. They come maybe three or four times a century. I think this is one of them.

Another reason why the bull market is back – Coppock indicators

Years, decades ago, I reintroduced the Coppock indicator to the Investors Chronicle, where it had first been featured in the 1950s by legendary editor, Harold Wincott. Coppock was a Texan who devised weighted momentum indicators for the Dow Jones index. In a bear market his indicator would go negative and he said it gave a buy signal when it turned up from a negative position, i.e., became less negative.

On his analysis Coppock indicators become interesting when they turn negative, thereby creating the conditions for a new buy signal, and very interesting when the indicator becomes less negative and turns up, giving a long term buy signal.

Recently when looking at Coppock indicators, I decided to project the figures ahead for the whole of 2012. What happened was that when I projected the index numbers forward I saw Coppock buy signals proliferating everywhere like weeds.

The key take-away from this analysis, to use a US expression, is that by the second half of this Year, all the Coppock indicators I have calculated will be heading strongly higher. This is not absolutely a done deal; if markets collapse by hundreds and thousands of points in the next couple of months these Coppock buy signals would not happen – but generally things are looking good.

How certain is it that this really is signalling a new bull market? Personally, I think it is odds-on. In the last century valid buy signals for the US Dow Jones index have probably signalled prematurely on a couple of occasions. Otherwise the record is brilliant. My conclusion is that you should be buying stocks. They could fall, they could even fall sharply, in the short term. Nevertheless, I feel that I have seen the future – and it is bullish. Personally I am fully invested.

To find out which stocks in particular I think investors should be buying, sign up for a free 30 day trial of Quantum Leap.

Fireworks ahead when 'big sideways' ends

We expect to be able to find rewarding shares for our subscribers to buy even in lean years in the stock market. But, there is no doubt that a bull market helps. UK and US shares have always been heading broadly sideways for around 15 years. The last time something similar happened between the 1960s and 1982 it was followed by a sustained bull market that ran with interruptions for 18 years and saw the NASDAQ index rise 50-fold. Could history repeat itself? We think it could. Globalisation and the rise of the emerging markets creates a great backdrop for shares.



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