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The Status of the Equity Bull Market

(March 12, 2010)

Dear Subscribers and Readers,

As the Greek fiscal crisis becomes a non-issue (for now), we plan to take our U.S. Dollar Index (specifically the March 2010 contract) long position off the table, for now.  Over the next couple of years, we remain bullish on the U.S. Dollar against the Euro and the Yen, but given the giant short positions on the Euro (specifically giant short positions put on by hedge funds that could literally switch their positions overnight) and the severe short-term oversold condition in the Pound Sterling, I feel this is now the right time to take our long position off within our MarketThoughts Opportunistic Investor Portfolio.  We plan to do the trade sometime today, and I will personally let you know once we do so in a “special alert” email in real-time.  Following is a performance update of the MarketThoughts Opportunistic Investor Portfolio as of Thursday at the close:

The Opportunistic Portfolio
(As of March 11, 2010)
Security Description Sector Date
BBY Best Buy Common Stock Consumer Discretionary 11/14/2008 21.70 39.47     81.9%
CCL Carnival Common Stock Consumer Discretionary 1/16/2009 21.11 37.25     76.5%
DXHO US Dollar Index March 2010 Futures FOREX 10/27/2009 76.58 80.29     4.8%

Let us now turn to the status of the U.S. stock market.  On Tuesday, the U.S. stock market celebrated the one-year anniversary of the end of one of the most ferocious bear markets in modern financial history.   Since the bottom on March 9, 2009, the U.S. stock market has enjoyed one of the best rallies in history – with the Dow Industrials rallying 62% and the Dow Transports 101%.  Subscribers who stayed with us through thick and thin would have benefited greatly from this rally – especially if one added to his/her equity positions during the few months surrounding the March 9, 2009 bottom.  The $64 billion question now is: What is the status of the current bull market?  Is it close to ending, or is there still a lot of “fuel” left in the tank, so to speak?

Let us first look at the Shanghai Composite Index – the benchmark for the Chinese stock market.  As we have mentioned numerous times, the Shanghai Composite has been a very reliable leading indicator of global equities in the last market cycle.  While it peaked at about the same time (early October 2007) as global equities, it was the first major stock market to bottom out as the Chinese government went “all out” to reflate the economy and market through a combination of a loose monetary policy, unprecedented fiscal/capital spending, and encouraging general credit growth.  As shown on the following chart (courtesy of, the Shanghai Composite bottomed out (declining about 70% from peak to trough) in early November 2008 – a full four months prior to the bottom in global equities:

The Shanghai Composite has been a leading indicator of global equities since 2007.  In fact, the Shanghai Composite was the first major equity index to bottom in early November 2008 – a full four months before the bottom in global equities.  This makes sense, as the Chinese had been the first country to both tighten and loosen its monetary policies in the last cycle.  However, given that China has now signal its intent to tighten – and given the still-loose monetary policies in the OECD countries – the Shanghai Composite is no longer a reliable leading indicator.

Going forward, however, there is no reason to expect the Shanghai Composite to be a reliable leading indicator any longer.  While strong Chinese capital spending and credit growth – combined with a general reflation policy by the OECD governments/central banks – allowed global equities to recover in early 2009, a slowdown (from here on) in Chinese capital spending or credit growth alone should not have a significant dampening effect on global equity prices.  With the Chinese still tightening monetary policy, it is not a surprise to see Chinese equities struggling.  More importantly, monetary policies in the vast majority of OECD countries are still very loose – suggesting that there could be a continuing dichotomy in U.S./OECD equities and Chinese equities.  In my opinion, the U.S. stock market remains in a bull market.  While the recent struggles of the Chinese equity market is troubling, it does not signal an imminent decline or an end to the U.S. equity bull market.

The strength in upside volume and breadth in the U.S. stock market is doubly encouraging.  This strength is best represented by the new bull markets in the NYSE Common Stock Only Advance/Decline Line, as shown in the following chart (courtesy of

NYSE Common Stock Only A-D lines (3-Yr)

A bull market typically does not top out until after the A/D line has topped out – the lead time could be anywhere from a few months to as long as two years (the A/D line made a significant top in April 1998, nearly two years before the peak of the late 1990s bull market)!  Since 1929, there have only been three instances (out of 19 bull market peaks) where there was no negative divergence between the A/D line and the major stock market indices – those being the 1946, 1952, and 1976 peaks.  In addition, the A/D lines of nine of the ten S&P 500 sectors (with the exception of the utilities sector) hit new highs yesterday – suggesting that the bull market still has a long way to go.

In fact, what is truly scary here is not the fact that the stock market is overbought and may be prone to a correction as soon as tomorrow or next week.  What is scary is that by judging by the many technical and sentiment statistics I keep – this bull market may still be in the beginning stages, at least by modern (post World War II) standards.  For example – even as many commentators believe that the Fed should tighten monetary policy – subscribers should note that the Fed's “credit easing” policy is still “in play” and actually won't expire until the end of this month.  Before the Fed can raise the Fed Funds rate, it needs to scale down its balance sheet by re-selling tens of billions of Treasury and agency securities into the open market.  Most likely, the Fed won't be raising the Fed Funds rate until Thanksgiving at the earliest, if not next year.  In addition, Lowry's proprietary Buying Power and Selling Pressure indices are still making new rally highs and new rally lows, respectively.  Such a concurrent move in Lowry's Buying Power and Selling Pressure indices signal that institutional investors are still accumulating stocks en masse.  Lowry labels this the “Primary Buying Zone” – the period where the greatest amount of money is made by the stock market bulls.   That is, while the stock market is overbought in the short-run, there is no doubt that this bull market remains intact and has a long way to run.

Yours Faithfully,

Henry To, CFA


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