Is This A Bull Market, Or What Exactly Is It?

This story features AMCOR PLC, and other companies. For more info SHARE ANALYSIS: AMC

By Rudi Filapek-Vandyck, Editor FNArena

Everybody seems to have his or her own definition of what makes a perfect bull market for equities and what does not. At least that's my observation from the past few years.

It is one of the reasons as to why some experts have been using the tag "bull market" now for about twelve months. Some experts have been talking about it for longer. Other experts are still talking about ongoing bear market for Australian equities today.

The distinction between the two is important as both markets come with sharply different characteristics and one would expect that, in order to get the best investment results, investors are best to adopt appropriate techniques and market approaches in order to deal with different circumstances and market dynamics.

Let's keep this simple: in a bull market most equities are on their way up. Time is on an investor's side because, over time, share prices will be at a higher level.

In a bear market, or let's call it a non-trending market, these key characteristics cannot be relied upon. In most cases, share prices do no appreciate over time. Also, most share prices will trade at below fair value, which offers an ideal platform for strong rallies and, as we have all experienced since 2008, most rallies take place outside a bull market, in particular when only a few see them coming.

According to very, very simplistic metrics (investing often works best when things are kept ultra-simple) we can define both opposite markets as one whereby time is on the investor's side, so "timing" becomes the focus in order to jump on the right stock that is as yet not too overvalued to still generate sufficient positive returns over time, and another market whereby time is not the real issue, but "risk" is. It's no wonder that in scenario number two many investors who previously adopted a longer-term Buy and Hold strategy, decide to become shorter term traders instead.

Timing versus Risk. Bull versus Bear.

If it's really that simple, why isn't everybody singing from the same song sheet today?

Maybe the answer lies in the fact that circumstances in today's share market aren't genuinely that simple. My personal problem with those experts who keep on calling today's share market in Australia a bull market is the fact that only a minority of stocks is doing all the hard work, while the clear majority is losing money for shareholders, and has been doing so for a long time now. (Let's not dwell upon the fact that equities in many other markets, including China, look more bear than bull anyway).

My problem with the bear camp is that personal favourites, such as Amcor ((AMC)) and McMillan Shakespeare ((MMS)), continue to perform splendidly. In fact, looking at the price charts for these equities in isolation, one would never have any discussion about bull or bear market. These stocks clearly are in an uptrend.

But then the easy counter-argument is that so many stocks clearly are not. I mean, BHP Billiton ((BHP)) shares are arguably inside a broad side-ways trading range which has kept shareholders wanting for more than seven years now (if we forget about the dividends). We can conclude the same for Woodside Petroleum ((WPL)). But so many price charts look so ugly today that one would have to be delusional to hold them up and declare with a straight face: bull market!

Is a bull market still a bull market if only a minority of the share market truly makes money for shareholders?

I'll leave the answer to that question to investors' own discretion, but in order to offer my own contribution to the public enigma, I spent a few hours behind my laptop, generating monthly price charts for all constituents of the ASX200. My notes during this process were kept very simple: upwards, sideways or downwards. And I have taken the approach that if a young child were to look at the chart, what would it say the trend is? I have taken a rather generous approach too. Where there was doubt, I opted for the most positive interpretation. Note also that monthly price bars omit most of the daily noise and volatility and by doing so I believe they provide a much better overview on what the underlying trends are.

Now for the results.

No more than 51 members of the ASX200 are clearly and unambiguously in an uptrend. To state my point, witness the following price charts for Amcor and Flexigroup ((FXL)). Surely we all agree these truly look like the price chart for a stock that is in a long, established and sustainable uptrend? Timing not risk should then be the main consideration for investors.

The bad news is, of course, 51 members out of 202 is no more than one quarter. A bull market built upon one quarter of the market only?

Things are not that dour. I can add 10 more stocks whose price charts look ugly but price action is now clearly suggesting the worst is behind and a new uptrend has begun. These ten stocks are:

– AMP ((AMP))
– Ardent Leisure ((AAD))
– Aristocrat ((ALL))
– Brambles ((BXB))
– Commonwealth Property Office ((CPA))
– Computershare ((CPU))
– CSR ((CSR))
– Dexus Property ((DXS))
– DUET ((DUE))
– Mirvac ((MGR))

And here is how a typical price chart for these ten stocks looks like:

Adding them all up takes the total to 61 stocks, or circa 30%.

Taking a generous approach to the price charts in front of me, I have selected another 63 stocks that arguably are trending side-ways, either inside a multi-year trading range, or at the bottom of the chart following a sharp sell-off from much higher price levels. In both cases there is hope (positive approach) a positive trend can soon be re-established.

This second (neutral) group combines many of the energy stocks (Beach Energy ((BPT)), Karoon Gas ((KAR)), Santos ((STO)), etc), as well as many of the mining services providers (Bradken ((BKN)), Downer EDI ((DOW)), Orica ((ORI)), etc), plus retailers, defensive dividend plays and stocks like Cochlear ((COH)) and Wotif.com ((WTF)), which display a lot of volatility, but in essence they are not going anywhere.

Combining these two groups at least takes us to a majority of the share market (circa 60%). However, given the presence of traditional media companies such as Southern Cross ((SXL)) and Seven West Media ((SWM)), perennial underperformers such as Nufarm ((NUF)) and business models under long term challenges, including Myer ((MYR)), Westfield Retail Trust ((WRT)) and Harvey Norman ((HVN)), it seems but very, very generous to assume all of these 63 stocks are consolidating ahead of the next sustainable uptrend.

My problem is that if I take out 10% as an extra insurance, I only have 50% of the share market to work with for my bull market investment strategies. Maybe the positive take-away from this exercise is that at least I have an idea which 50% of the market is suitable for that type of investment strategy?

The other 50% of price charts simply varies between ugly and very, very, very ugly. Of course, we can but hope that steady downtrends can be reversed in the not-too-distant future, but what is an investment strategy worth if it is based upon hope?

Here's two charts to illustrate my point:

Maybe we have just laid bare the key problem when trying to define what type of label this market deserves: with only 50% going into one direction, and 50% trending in the opposite direction, putting a label on this market really is a case of where do I put my emphasis? The more important question for investors is more likely: which shares do I own and which shares do I want to own? And what's the best strategy to apply? Each opposing category commands a different approach. So what's it going to be: timing or risk?

Making the correct distinction between the two will determine investment results in the year(s) ahead.

Special Note: I will add a follow-up story to the website on Tuesday which will name all 61 stocks (51+10) that are clearly in a sustainable uptrend, including many price charts. Paid subscribers can hopefully use the information to their own advantage.
 

(This story was written on Monday, 08 July 2013. It was published on the day in the form of an email to paying subscribers).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website)

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DO YOU HAVE YOUR COPY YET?

At the very least, my latest e-Booklet "Making Risk Your Friend. Finding All-Weather Performers", which was published in January this year, managed to accurately capture the Zeitgeist.

All three categories of stocks mentioned in the booklet are responsible for the index gains post 2009 and this remains the case throughout 2013.

This e-Booklet (58 pages) is offered as a free bonus to paid subscribers (excl one month subs). If you haven't received your copy as yet, send an email to info@fnarena.com

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FNArena At The Trading & Investing Expo in Sydney

– I will be presenting at the upcoming Trading & Investing Expo in Sydney (Friday 19 and Saturday 20 July at the Sydney Exhibition Centre). Investors can download free tickets to the event, courtesy of FNArena. Simply click on the following link: http://sydney.tradingandinvestingexpo.com.au/visitor/register and when prompted, enter the promotional code FNARENA. Your free tickets will be emailed to your inbox. FNArena will also host a stand at the Expo.

– I will also present at the Trading & Investing Expo in Melbourne, August 23-24 (where FNArena will equally host a stand) – ticket promotion to follow

– Later in the year, I will present to members of AIA NSW North Shore at the Chatswood Club on Wednesday 11 September, 7.30-9pm

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