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5 Growth Names if Market Rally Holds
10/18/2011 9:31 am EST
After some extensive research into secular bull and bear trends, Edward Hornstein tells us what to expect at this juncture, based on market history. He also shares his views on some growth names poised for growth if the current uptrend can remain intact.
Kate Stalter: I'm speaking today with Edward Hornstein of Edward Hornstein Capital Management. Ed, I know you've been doing some research into market cycles, so tell me a little bit about what you’ve found, and what that might mean for the markets, looking ahead.
Edward Hornstein: Sure, Kate. What I've done over the past few months is I've decided to take a look back in history.
The database I have goes back to 1900. What I've been doing is going back throughout the past 110 years or so of market history, with the belief that cycles repeat themselves.
Even though you've got machines and high frequency trading and things might move a little faster these days, there are still the human elements of fear and greed, and history generally rhymes and repeats itself.
So, I've gone back through 110 years of history, and what I've done is I've isolated four secular bull and bear markets. And what I mean by secular bull and bear are these are longer-term phases.
For example, from let's say 2000 to now, 2011, the market has basically been flat. The Nasdaq is obviously is way off its high, but if you go look at the Dow and S&P ten years ago, it's pretty much exactly where it was. And that might continue for a few more years. That's known as a secular bear market.
Then you also get the secular bull markets. A good example of that would be 1982 to 2000. If you look at a chart of any major index for those 18 years, you have a giant bull market.
Sure, you have the 1987 crash and you have some mini-bear markets there, but pretty much the trend over those 16 to 18 years was up, and the trend now for the market is basically sideways. And that's the difference between a secular bull and bear.
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In a secular bear market like we're in, it basically allows the market to work off the excesses and the froth and the expensive evaluations from the prior secular bull.
So, what I've done is, I've gone through history and I've isolated the four secular bull and bear markets since 1900 that the market has witnessed. And I want to examine them with the idea that we are probably in the eleventh year of a secular bear market now that began in 2000.
I've gone through all the secular bear markets and I've looked at them, and I've looked inside those cycles—the mini bull and bear markets you get within those secular bears.
For example, if we talk about the secular bear now, from 2000 that's still going on, we're in a longer-term secular bear, but inside that you had mini bull and bear markets. We had the 2000 crash, otherwise known as the dot-com crash, which was a bear market lasting from 2000 to 2002, and we had a mini bull market from 2003 to 2007. We had another mini bear market from 2007 to 2009, and another smaller bull market from 2009 to most recently this spring.
So, inside the longer-term secular bear market, you get what I call mini bulls and bears, what some people call cyclical bears and cyclical bulls.
Then I wanted to go into those mini bulls and bears and further isolate and examine what they look like, with the idea being: Let me take a look at how these mini bulls and bears look in these secular bear markets, and kind of try to figure out what the most likely scenario is for the market here going forward.
The research has been very, very interesting. One interesting point I found is that generally in a longer-term secular bear market, the absolute low of that bear market is generally reached in the middle of the bear market.
For example, this secular bear that started in 2000 and is still going on, we saw so far the absolute low in 2008 when the market crashed. In the 1966 to 1982 secular bear, the absolute low was made in 1974, similarly eight years into that secular bear market.
So, if history is any guide, there's a decent chance that we've probably seen the absolute lows for the market back in 2008. But what my research tells me is that for the next few years, there's probably going to be a lot more of what we've seen, these up and down markets, these mini bulls and bears, and kind of a trendless market until we finally come out of the secular bear market.
Kate Stalter: Which certainly is consistent with a lot of the geopolitical and economic developments that have been occurring recently, and are forecast to occur for the foreseeable future.
Edward Hornstein: Absolutely. And it just goes hand in hand with a de-leveraging process that's still going on. You’ve got the macro themes that you've discussed.
Eventually, these things will be put behind us, and we'll have a brand new secular bull market, but the key thing for investors to remember is that during these periods, there are plenty of money-making opportunities.
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For example, the market has been flat for ten or 11 years, but we had a great bull market from 2009 until recently, that may or may not be dead yet, and from 2003 to 2007 we had a big bull market.
What I wanted to see on my research was what do the bull markets in the secular bears look like, and how to they differ from the bull markets when you get an 18-year secular bull.|pagebreak|
Kate Stalter: Let's shift gears a little bit, given all of that, into what investors should be looking at, going into the fourth quarter of the year. As everyone knows, last week, the week of Monday, October 10, there were some strong rallies on the markets on optimism about Europe. What does your research show you we might expect looking ahead?
Edward Hornstein: Well, here's the interesting question. I've just been debating it with myself every day. Generally, when you get these cyclical bulls and the longer secular bears, they generally—not always but a lot of the time—have three separate legs up.
So, if we examine the mini bull that began in 2009, we had our first giant leg from March 2009 to the summer of 2010. Then we had our first correction last summer, which was about a 16% to 18% correction. We then had a second thrust from about August/September 2010 until the spring of 2011, about April or May. And now we've been in a bearish period or a major correction since that time.
Now, if history is any guide, there's a decent chance that as bad as the news is right now, and as ugly as a lot of the technicals look, that we could have a third leg up in this bull market that began in 2009. If that's going to occur, you would probably want to see the lows that we hit last week hold. The market's come up a little bit, volume's been low, so I think it's still a work in progress.
One thing I'm on the lookout for is to see some larger volume come into the market, and to see some breakouts with some leadership, which we really haven't seen. That could show up at any time. So, if we're using historical analysis, there's a good chance that we might have a little bit more room in the cyclical bull that began in March 2009.
However, the converse of that is: If what we are seeing right now is not the second intermediate correction in the bull that began in 2009, but if in fact the bull ended in the spring and we're just going to get a snap-back rally and we turn lower and break those lows, that would probably confirm that the bull ended in the spring and that we're beginning another mini-bear market.
To be honest, the situation remains fluid. Based on history, it suggests that you could potentially have a third leg up here. I think something going for the market is that all the news is negative, sentiment is very bearish.
We've already corrected more than 20%, and a lot of individual stocks in areas have corrected 50%, 60%, or 70%. A lot of the financials and commodities have absolutely crashed.
So, if you get some good news out of Europe and some earnings are better than people expect, you might have a fourth-quarter rally here. The two keys will be
- to watch for volume to pick up in the indices, and
- basically just monitor the new-high list every day. You want to see stocks breaking out into new highs, and you want to see that new high list growing every day. We're not quite there yet, but I'm still hopeful in the weeks ahead we'll get there.
Kate Stalter: Give us some ideas of some names from your watch list, Ed. Stocks that are starting to meet some of the fundamental and technical criteria that you look for.
Edward Hornstein: Sure. Again, if we get another leg up here, it's probably not going to be a new bull, so you'd probably see a lot of the old leaders that have led continue to lead. So, a bunch of these names are probably familiar to a lot of your subscribers and the MoneyShow investors.
Apple (AAPL) is a name that's been going for a while. Everyone knows it, but it's showing excellent relative strength. It's only a few dollars off its 52-week high.
As old as this stock is and as long as it's been going, they keep innovating and coming out with products that people want, and they grow their earnings. I think if you see another leg up here, Apple would probably be a go-to leader.
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Amazon (AMZN), I think is the same, and I'm just basically looking at stocks with superior fundamentals that have held up very well. The market came down 20%, and Amazon right now is sitting right off its 52-week high.
There are a few stocks that are a little bit newer. A company called RightNow Technologies (RNOW). They're kind of a cloud play. They're really growing their business very well and the stock has held up extremely well. Its relative strength has a new high ground, so that's a stock I'm looking at.
Intuitive Surgical (ISRG) is another one. They make robotic devices for hospitals and doctors. The stock has really just been in a giant two-year, three-year base, and keeps hitting resistance at about $400.
If they report good earnings, and that stock makes a new high on big volume, that’s probably a company I'd be looking at.
Then, sector-wise, technology might be an area that could lead if we do get another leg up here. I've been noticing when the market came down and retested the August 9 lows, a lot of the semiconductor stocks and more of the tech stocks really only pulled back and didn't come anywhere near their lows, and they seem to be showing excellent relative strength.
If you just look at the [Philadelphia Semiconductor] SOX index or the Semiconductor HOLDRS (SMH), you'll see that a lot of these semiconductor stocks are coming up the right side of their bases. I think technology certainly could be a play here.
Lastly, there's a bunch of names, but I will mention Ulta Salon Cosmetics (ULTA). The stock held up very well. It's had a big run, but they're really growing their business financially, and what they're seeking to do is become the dominant company where women and even men get their personal needs and cosmetics in stores.
The trend used to be that when women would go to buy their make-up, they'd go to a department store. But, we're seeing a little bit of a move away from that, to women going to buy cosmetics and make-up in actual specialty stores.
Ulta Salon is probably the leading store in that group. I think they have about 500 stores nationwide, and they want to double that and expand to about 1,000.
The business is growing really well. They've got an excellent management team there. The stock is sitting pretty close to a 52-week high, so if we get another leg up and that breaks out, I think that could provide some leadership for the market.
Kate Stalter: So, essentially, just to boil it down to what investors should be looking at next, Ed, before they jump in: It’s really continued market gains on heavy volume would be a confirmation signal?
Edward Hornstein: Yeah, it's the old O’Neil follow-through day concept. We want to see a big move in one of the major indices, maybe 1% or 2%, on pretty big volume—bigger volume than the day before, the higher the better. That usually confirms that the institutions are coming back in and buying.
Once you get that, the next step is to look for stocks breaking out of bases. The thing I do every day, and I think it's very easy for investors to do, is to just look at the new high list.
In a good market uptrend, you'll start seeing the new high list expand, where maybe one day there's 30 or 40 names, then there's 70 or 80, all of a sudden you'll start seeing 100 to 200 names every single day on the new high list.
I always say you can't hide a bull market, so if we are going to get another leg up, and we're not going to roll over here. You'll start seeing that new high list expand substantially.
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