The Bull Market Is Still Alive

08/18/2011 3:43 pm EST

Focus: MARKETS

James Stack

President, Stack Financial Management

If the market has peaked, it would violate certain technical indicators that have held true for the better part of a century, says Jim Stack of InvesTech Research in this exclusive interview with MoneyShow.com. However, Stack does advise investors to rotate into more defensive sectors as the bull continues to age.

As we are recording this, it is in the middle of a period when there is tremendous volatility in the markets—500 points up one day, 500 points down the other day. We are well off the highs, but I have a feeling that you still think we are in a bull market.

Well, the one thing we certainly have had over the last 60 days—and particularly over the last few weeks going into August—is volatility; the traders basically have run rampant.

Now what is interesting about this, Howard, is that we have short-term tools that we have developed to measure the degree of oversold conditions in the market. In the last couple of weeks, we have had a couple of days that were some of the most oversold days in 50 years. That is typically how corrections end, not how new bear markets start.

In addition, if you look at the macroeconomics—for example, the Leading Economic Indicators—the ISM survey of manufacturing fell and that caused a big stir. That is a lot of fuel for those thinking that we are going into a double-dip recession.

But the same ISM survey on the service sector actually went up strongly. In addition, the initial claims for unemployment have fallen.

All of this macroeconomic evidence does not confirm or indicate that we are going back into a double-dip recession.

Does that happen though before the market moves or does it happen after the market moves?

Well, the market always leads the economy, but there are economic statistics that tend to lead with the market; those things like the initial claims for unemployment, of course; the Leading Economic Indicators—not unemployment, that tells where we’ve been six months ago.

At the same time, if we look at the technical health of this market—the technical underpinnings of the market—there has been some damage done. I mean, we have definitely had some bear-market leadership come in. We have had some destruction in breadth.

But if you look at the market peak back in April, where market indexes peaked, the advance/decline line breadth hit a new high in July. There is not a single market peak or market top in the past 70 years where that has happened, where breadth kept going up after supposedly a bull-market peak.

So if this was an important big market top back in April, it is unlike anything we have seen, in the last 30 years in real time—that is from our financial research—or in the past 70 years that we can look at from a technical aspect.

So basically, your take is we are still in a bull market. However, we are two years into a bull market. I think as you pointed out, the average length of a bull market is four years. That means this one could be shorter or it could wind up being longer.

So how do you see us when you look at the cycle of the market, if you still think we are in a bull?

Well, if that was the bull market, it tied for one of the shortest bull markets in 50 years. On average, bull markets do last less than four years, exactly 3.8 years if you want to be exact.

The fact is that if we are still in a bull market, we are in the third year. That means that the possibility or even the probability exists that we could be in the latter half of the bull market.

That should affect one’s strategy, how you allocate your portfolio. You don’t go out and keep putting money into those sectors that are the strongest performers in the first year, because they tend to become the highest risk sectors as the bull market matures. Those like financials and consumer cyclicals.

You want to be phasing back out of those sectors into some of the more defensive sectors; they would historically be health care and energy, with oil pulling back to $80 after reaching a peak of $113 to $115 a barrel earlier this year.

You have a lot of energy stocks out there selling at really reasonable, single-digit PE ratios, and they are cash machines. You haven’t been able to pick up energy stocks at these kinds of valuations in a long time.

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