We’re very skeptical that the rally from last October’s low represents the first leg of new bull market. But if it is—as many believe—then it has unquestionably inherited the worst set of genes we’ve ever observed in the species.
While our breadth measures do not consider this rally to be thrust-worthy, when based on nothing more than performance, it’s difficult to distinguish between the “first up-leg” in a new bull market and a bear-market rally. The vital signs at present appear to be more in-line with the latter (although making that conclusion based on price action, alone, is hardly better than a coin toss).
In late March, the S&P 500 came close enough (3.5%) to its January high that a second birthday celebration for the bull seemed warranted. Who doesn’t love a party? But, as we noted in a recent Chart of the Week, a milestone like this is a good excuse to haul our pet to the veterinarian for a checkup.
Just after yesterday’s close, we loaded our precocious bull into an SUV and drove to the local veterinary clinic for a two-year checkup.
Our bovine buddy drew some sympathetic stares while we were waiting in the lobby. Noting our bull’s droopy eyelids and gray facial hair, an assistant informed us, “You know, you didn’t actually need to bring him here. We now have a mobile euthanasia service.” We just smiled, and waited for the veterinarian, who is said to be a specialist in this new super-species of bull.
By our count, the current bull market is the 13th of the postwar period. The 88% gain achieved by the S&P 500 in less than 14 months already places this bull sixth in terms of cumulative gains. We considered it a hindrance that this bull commenced from higher valuation levels than any other in history. Instead, they seem to have provided a head-start.
The first up-leg of the bull market has catapulted many Large Cap valuations to levels seen only in 1999, 2000, 2019, and pre-pandemic 2020. At the six-month point on September 23rd, the S&P 500 P/E on 5-Yr. Normalized EPS had already reached 26.9x—a reading that is 30% higher than at the same point of any other bull market.
The bull market took out another old record last month when the S&P 500 topped the cumulative total return of the 1949-56 upswing. The total return since March 9, 2009, is now 468%. Since the highs of March 2000, the S&P 500 cumulative total return is actually a few basis points behind U.S. 10-year Treasury bonds.
Three months ago, Large Cap Growth and Momentum were the winning ways to play the market; the long-time resiliency of these entrenched leaders was a cornerstone of the bullish case. Suddenly it’s Value and Deep Cyclicals leading, anything possessing Momentum, of late, has turned toxic. Ironically, this “new” leadership is now the foundation for the bullish reasoning.
The stock market looks overbought on virtually every technical measure we can think of, but an overbought condition doesn’t always mean the market is vulnerable. To the contrary, we’ve found that “initial” overbought readings—like the one triggered last week on the S&P 500’s 14-Week Relative Strength Index—are generally followed by above-average gains in the intermediate-term (Chart).
While the sequence of index peaks traced out YTD is not exactly a textbook one, the market’s internal diffusion is comparable to that seen at many major tops, including 2000 and 2007.
Up front, we need to remind readers that the Major Trend Index is bullish at 1.08, and our tactical funds remain well-exposed to equities with net exposure of 60-61% (versus a range of between 30% minimum up to a maximum of 70%). That being said, we’re focused on the likelihood of a major defensive portfolio move in the near future, which probably comes as no surprise to Green Book readers (...what with us publishing a prepackaged obituary for the bull market just a month ago).
The S&P 500 made a cycle high on December 29th, and in early February mounted another assault on that level. Ignoring valuations, the economy, Europe, etc. (not necessarily our recommendation), the most bullish observations we can make about the stock market are: (1) its peak is still recent; and (2) the S&P 500 had significant company at that peak—including the Transportation stocks, Utilities, Russell 2000, S&P 500 Financials, and even the NYSE Daily Advance/Decline. All in all, this action is broad enough that a final top shouldn’t be imminent.
We examine Emerging Markets from both the top-down and bottom-up perspectives as we try to identify where to move and what to expect. We check in on two successful EM thematic group ideas as well.
Give those who’ve advised investors to “Sell In May” over the years some credit: they’ve never been too specific.