How Long Will the Bulls Run?

The endless parties are over, the lights are put away, the tree is already covered in snow out by the woodshed, and the kids are all back in school. Our three-month interval of obsessive, perhaps even feverish, fantasy is finally (blessedly?) over. Now, I am not one of those people who make a lot of resolutions this time of year. While I am (gladly!) cutting back on rich food and drink for a bit, it has little to do with the turning of a calendar page and everything to do with the reality that confronts me in the mirror.

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These clear winter mornings just seem to lend themselves to bracing up and facing the truth. In that same bracing spirit, I thought I might throw a little fresh, cold water on all those overexcited investors who are driving the markets toward yet another new 52-week high. This is not merely an exercise in stoicism. A clear understanding of exactly where we are in the larger market cycles is essential if you wish to extract – and retain – any coin this year.

20% Up – Or 38% Down? It All Depends on Where You Start Counting

Yes, the market went up in 2009. For all the talk of recession and economic overhang, if you bought into the S&P 100 last January, you are up some 21%. But when you stop to think about it, what’s so darned important about January 1st? Basically, it’s the beginning of a new tax year, and that’s about it. Strip away the sentiment around New Year’s Day. Try instead to look at today’s price as one small data point amongst decades of equally valid data points. Suddenly, we are not “up” all that much, anymore. Rather, we are par with October of 2008, September of 2003, and even March of 1998. Empirically, your classic long-term buy-and-hold investor’s blood sweat, fear and tears of the past decade have been for naught. But even this sad thought is really just a bit of imaginative screwing around with meaningless entry and exit points. To truly understand where the market is right now, you must stop thinking calendrically altogether, and just look at the facts.

The Cold Facts

When you look at the chart of the S&P 100 (OEX) by month for the past decade and a half, it clearly maps out the falling trend that has dominated our affairs since 1998. Within the context of this long trend, all the action of the past 10 months is merely the first half of a rising leg within that falling trend. As such, it is reasonably similar in nature to its two predecessors in both length and angle of attack. Historically, this trend has common elements. Both rising cycles began during periods of low employment and tepid economic growth, which were addressed by massive increases in the supply of money. Similarly, both crashing cycles were triggered by the inevitable inflation that results from loose monetary policies (and loose behavior). They can argue about the minor details all they like. They can laud the gains, and name favorite demons. But these are the cold hard facts, folks.

12 Months – At Best

I have taken the liberty of mapping out the most probable path of the rest of the current rising cycle. It has the market rising for four more quarters, the last of which will “enjoy” high inflation, increasing volatility and decreasing returns on investment. This chart prediction integrates neatly with the electoral cycle. Note that no party has ever retained power when unemployment has exceeded 7%. With this deadline in mind, you can bet that the Democrats will continue to jack up currency in circulation through Nov. 5, 2010. Fact of the matter is, you have about 12 months to make money in stocks. After that, the market will belong to the bears again.

5 Hot Stocks to Profit From the Bulls…

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