The Argument For A New Bull Market

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By Michael Gable 

If you remember back to the middle of 2012, there were many issues that were concerning investors. We had unsustainable borrowing costs in Spain and Italy, threats of Greece leaving the Euro, anaemic growth in the US, and falling growth in China. You would have noticed that markets were edging up on low volume, and mainly in the “safer” stocks, because risk appetite was still very low, which means another dip down was a strong possibility.

Investors into safe stocks did so not because the company itself had increased prospects, but purely because the alternative, term deposits, was becoming unattractive. With the ECB having brokered a deal to get borrowing costs coming down in Europe and the economies of US and China recovering, we now in hindsight have a situation where we can justify the current rally. It brings out those who base investment strategies on throw-away lines of Warren Buffett such as “attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Sounds good in theory when you are taking a punt, not investing your life savings, because “In the business world, the rearview mirror is always clearer than the windshield” and it doesn’t hurt to obey the following rules “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” It seems as though there is a Warren Buffet quote for every occasion. It is said that people often make irrational decisions and then try to rationalise their actions later. Well if some of last year’s rally seemed irrational, we now need to see improved company earnings to rationalise it.

You really shouldn’t be concerned that the market has gone up the last few months if you still have some spare cash. Because you cannot identify a bottom until it has already occurred. As soon as you use that information to project what is likely in the weeks or months ahead, a more fascinating picture emerges. If the scary, low volume defensive rally that started last year is actually the beginning of a bigger move, then we can use this lower risk environment to springboard up to something greater. Suppose that we are emerging out of a bear market for equities. Remember, the average length of bear markets is around 5 years, and we have now surpassed that. If you look back to the beginning of the last bull market in 2003, we can start to see some similarities.

In the chart below (all charts on a weekly basis), I have plotted the performance of the S&P/ASX 200 (XJO) [black line] in relation to the Telecommunications sector (XTF) [yellow line], the Financials Index (XFJ) [blue line], the Materials Index (XMJ) [red line], and the Energy sector (XEJ) [green line]. With the XJO in black, you can see how each sector has performed since the market “bottomed” last year.

The chart shows what feels to have happened. For simplicity I have not used every sector, but we can see that Telecommunications, or Telstra ((TLS)), and the Banks have led the market higher. That is plain to see. Materials and Energy have massively underperformed during this time. You might find yourself thinking that the materials and energy sector are in trouble and you’d be right in assuming that this is not the case. If you were to look back at how investors reacted to the start of a bull market in 2003, you would see some similarities.

[Note: This report is an excerpt from a wider report available at the website below.]
 

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Visit Michael Gable's website at  www.michaelgable.com.au/.

After leaving Macquarie Bank's Securities Group in 2008 after many years of service, Michael has gained a highly regarded reputation in the financial services industry. As a Private Client Adviser with Novus Capital, Michael has become a popular live commentator and analyst for Sky News Business Channel’s “Your Money, Your Call” program. He is also the author of the weekly stock market report “The Dynamic Investor”.

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management.

Michael deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (Rep. No. 376892) of Novus Capital Limited AFSL 238168 ACN 006 711 995. Michael Gable and Novus Capital Limited, their associates and respective Directors and staff each declare that they, from time to time, may hold interests in securities and/or earn brokerage, fees, interest, or other benefits from products and services mentioned in this website. This website may contain unsolicited general information, without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you must consider the appropriateness of the information in this website or the Product Disclosure Statement (PDS) or Financial Services Guide (FSG), having regard to your objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance. Michael Gable and Novus Capital Limited believes that any information or advice (including any securities recommendation) contained in this website is accurate when issued but does not warrant its accuracy or reliability. Michael Gable and Novus Capital Limited are not obliged to update you if the information or its advice changes. Michael Gable and Novus Capital Limited and each of their respective officers, agents and employees exclude to the full extent permitted by law, all liability of any kind, in negligence, contract, under fiduciary duties or otherwise, for any loss or damage, whether direct, indirect, consequential or otherwise, whether foreseeable or not, to the extent arising from or in connection with this website.

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