A New Bull Market For The ASX 200?

Technicals | Feb 01 2024

By Daniel Goulding

Don’t accept imitations!

Australia's benchmark share market index has carved out a new record high, prompting some experts to declare that the bull market remains alive and well. Before making any hasty investment decisions, however, make sure you read the fine print. The definition of a bull market can vary, and so can its implications for the future.

Although the term has been in the financial lexicon for more than 100 years, there is still no widely agreed-upon definition.[1] The one that is commonly cited is when a major share market index rises by 20% or more from a recent low. [2] While this definition is mathematically elegant, it does not necessarily capture the essence of what a bull market is.

Bull markets are characterised as a time when stocks have been rising, and there's an expectation that they'll continue to rise in the foreseeable future. There's a sense of confidence or optimism about the future, which arbitrary price changes cannot measure.

During the bear market of 1929 to 1932, the Dow Jones Industrial Average fell almost -90% in just three years. Throughout this decline, there were five rallies of more than 20%, each lasting only a few months.[3] These rallies were merely countertrend rallies within the context of a bear market, and it's difficult to categorise them as anything else.[4] Bull markets deliver higher returns with less volatility than bear market rallies.[5]

Qualitatively speaking, we can say that investors remain nervous and uncertain during a bear market rally, while they are confident, sometimes brazenly so, during a bull market.

It is also important to understand that a significant rise in a market index does not always equate to a rise in investor confidence. For example, Australia’s benchmark share market index, the S&P/ASX200 Index, measures the performance of only the 200 largest stocks by market capitalisation, representing less than 10% of all listed companies. The larger the market capitalisation of a company, the greater its weighting in this index.

The ten largest companies, therefore, make up almost 50% of the ASX 200.[6] If this index is moving higher on the back of strength in the largest stocks, while investors are abandoning most other stocks, investors are anything but confident about the outlook.

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