It's Not Over 'Till Its Over

I get mail:

One reader writes: "I have the feeling that this secular bull market is not yet over and it might even surpass the longest bull market (1990-2001). What do you think?"

An excellent question!

I am assuming that the bull market in question is the S&P 500, because the All Country World Equity Index is no longer in a bull market (it ended last August) and until it breaks out of it, is now trending down:

As for the S&P 500:

Until it breaks the 1800 level (which is more or less at the lower end of the up sloping trend channel), the "secular" bull market is alive. However, a bull market, as we know it, is characterized by higher highs and lower highs. Since May of 2015 the market has been characterized by lower highs and lower lows, but the lows have yet to breach the lower band of the trend.

So much for the technical details, which only tell part of the story.

As for the fundamental details: 

On a price to earnings basis, stocks are expensive. Earnings are entering into their 4th consecutive quarter of negative growth.

As we have said before, until the green dotted line (prices) moves down to intersect the blue line (earnings), stocks remain expensive. Unless earnings growth starts to re-appear, it makes little value sense to buy stocks.

However, while retail (individual) investors appear to have "got that memo", corporations continue to actively buy back their own shares:

Low interest rates (cheap borrowing costs) continue to inspire corporations to buy their own shares. It also allows CEO's to bank bonuses for the improvement in the share prices of the companies that they run.

Money is not going into capital spending and investing for long term growth.

How long can this go on for? As long as interest rates remain low, perhaps (or until lenders no longer want to lend to corporations whose earnings are not growing).

It's not over 'till its over, but I fear that it is not long before the reality catches up with the myth.

As always, I am thrilled to get readers questions (and feedback) please keep them coming.

scott@highrockcapital.ca

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