A Key Indicator for Future Market Direction Part 2 of 2
By Stephen Sutherland, author of Liquid Millionaire.Posted in the Category of Investing, Stock Market, Wealth Building, Financial Advice on 3rd September, 2010.
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A few weeks ago I read an article in the Financial Times that was written by a chap called Dominic Picardo. Because the article had the headline “Keep an eye on techs,” it immediately caught my eye.
The article started off really well, stating that it pays to keep your eye on the Nasdaq 100. I quote, “...in a genuine bull market, the Nasdaq 100 – currently home to such giants as Apple, Google and Microsoft – usually outpaces the broader-based S&P 500.”
So how could an article that started off in a way that totally synced up with my investment philosophy all of a sudden totally conflict with my deep held beliefs about how the stock market works?
The answer is that Domenic believed that we are in a bear market (down market) where as I believe that we are in a bull market (up market).
Dominic didn’t say why he believed that we are in a bear market but here’s why I believe the exact opposite.
My belief that we are in a bull market comes from facts and not opinions.
As stock market legend Jesse Livermore once wrote, “Markets are never wrong–opinions often are.”
How the market works is how the market has worked since it began in the late 1800’s. It is always about supply and demand and the way to analyze supply and demand is through looking at price and volume action on stock charts.
And what the facts on charts are telling me right now is that we in currently in year two of a bull market that started in March 2009. Many people would say “yes, the market was strong in 2009 but this year it’s done nothing.”
And they’d be right because the market has done nothing. However, even though the stock market indexes are currently in a correction, the market is clearly still in a bull phase which started in March 2009. That means I see the markets year to date performance, and this current pullback as normal.
Let me explain why. Since March 2009 we’ve seen the Nasdaq Composite surge 100.2%, a triple digit gain which is a remarkable move in a short space of time.
And so a double digit correction off a 100% gain should be seen as a natural way the stock markets work. In other words, even in the strongest of markets, they have to rest every now and again to regain their strength ready for their next leg upwards hence why the market has not made any price progress so far this year.
To help you recall how strong this bull markets been so far, let me ask you a question.
Did you know that in the previous bull market (2003-2007) the Nasdaq gained roughly the same amount?
Yes it’s true. The Nasdaq made a 98% gain from March 2003 to October 2007. That means that in the last bull market it took four and a half years to make the same gain that it’s made in just one year! And so it’s no surprise to me that the market is resting and that we are currently in a retracement (correction) period.
And because the Nasdaq surged so much in such a short space of time, it tells you that right now, even though all the headlines (and many opinions) are doom and gloom, the facts don’t lie: we remain at the start of a very strong bull market.
Because bull markets last multiple years, it means if 2009 was year one, 2010 is year two. Here’s a reminder of two important elements that state how the stock market works:
1. Bull markets tend to last between two and four years.
That means even though we are presently in a bull market correction period, we could have between one and three years left to run on this current uptrend.
2. The big money is always made in the first two years of a new bull market.
That means even though the first half has been poor in performance related terms, 2010 could still turn out to be a good profit making year.
Until next my friend.
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