Friday, April 15, 2011

Bull Market Long in the Tooth, but...

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

 
Over the first three months of 2011, the S&P 500 gained 5.40%, certainly not too shabby.  For the third time since the 17% correction ended in July 2010, we saw a healthy, needed and somewhat expected 4-8% pullback as you can see from the chart below. These digestive periods have followed very strong rallies that needed a pause to refresh, much like after eating an enormous meal. The brief bouts of weakness allowed the market to rest, re-gather itself and shakeout the weakest investors, which is necessary to begin a new leg higher.





 At the risk of getting too technical, you can also see the dark blue line, which represents that average price of the last 50 days, orange line, which is 89 days and light blue line, which is 150 days. The November 2010 4-8% pullback kissed the dark blue line. The March 2011 4-8% pullback visited the orange line. The natural progression calls for the next significant decline, which could begin later this quarter, to come down and say hello to the light blue line, significantly below current levels but rising every day. 

The bull market turned two in early March and continues to surf a tsunami of liquidity perpetuated by Ben Bernanke & Co. The Fed's quantitative easing part II of buying U.S. Treasury bonds did not change, but that is scheduled to conclude in June.  Interestingly, the only real period where the Fed wasn't pumping a torrent of money into the system was last spring, which coincided with a 17% correction! 

As I've mentioned before, there will be unintended consequences and benefits from all of the Fed's actions.  A powerful bull market in stocks and bonds have made most people very happy, but far less are enjoying the reflation of commodities with energy prices soaring day after day, week after week and month after month. 

The closer we get to what I see as a potentially bull market ending period, mid May to mid June, the more volatility should increase and more cracks should appear in the foundation of the markets. We are already seeing pathetic volume and some more significant technical damage to a few of the major indices. 

I am keenly watching the performance of junk bonds and the small cap stocks for signs of liquidity leaving as well as sector leadership during rallies.  I am concerned that two key sectors, banks and semiconductors, do not behave well, but I also don’t want to jump ship before it’s really necessary. Sometimes, the market will fool the masses and right itself on a dime and soar to new highs.  That’s what makes certain periods much more difficult than others, especially those in aging bull markets.

Feel free to email me with any questions or comments at Paul@investfortomorrow.com.
 
Until next time…

Paul Schatz


Heritage Capital LLC

Follow us on Facebook at www.facebook.com/heritagecapital and on Twitter  @Paul_Schatz

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