No Signs of Trouble Yet

05/24/2013 8:30 am EST

Focus: MARKETS

James Stack

President, Stack Financial Management

InvesTech's Jim Stack, who was bullish before the market lows in 2009, updates his analysis of the stock market and tells investors what they should be watching now.

How long does a bull market usually last? Talking today to Jim Stack, and how do you compare this bull market to the past bull markets?

Well Ray, I think it's important for investors to have that historical perspective. Where are we on the Wall Street roadmap?

In terms of historical comparisons, this bull market is 4.2 years old. The historic average duration or lifespan of past bull markets for the past 80 years is just 3.8 years, which means this bull market's already longer than the norm.

Most bull markets end between two and five years. There have been only three bull markets in the past 80 years that have lasted beyond five years, so you might say that this bull market is a little bit long in the tooth. That's the bad news.

The good news is that those bull markets that tend to last longer come during longer economic expansions, which experience mid-cycle slowdowns, and one can certainly say over the last 18 to 24 months that we've had a slowdown in this cycle, so don't try to second guess the end of this bull market.

So where do investors start to look for trouble if there is trouble coming?

There are a number of warning flags that typically appear in the latter stages of bull markets.

One of those areas is in divergences. You look for the divergence in participation. Participation starts narrowing as you get toward a bull market peak. We saw it in 2007. We saw it really in spades in the peak in 2000.

One of the areas is keep an eye on the Advance-Decline line. It's a technical tool that does the accumulative net advances minus declines. Breadth today is hitting on all cylinders with the market.

Another area to watch is in those bellwether stocks. Those stocks tend to lead the market at market tops; they're in economically sensitive sectors, and what investors need to know today is those economically sensitive sectors and those leaders in those sectors are hitting new highs today. That's the good news.

How does "sell in May and go away" affect your outlook?

Well, "sell in May and walk away" means you want to invest only the six months of the year that are most profitable from November 1 up through the end of April.

Historically, if you run the analysis, it's amazing because investor A, who invests only from November through April, captures over 90% of the stock market profits. That's why this truism has gained such popularity on Wall Street.

Here's what you also need to consider about that truism. That doesn't mean every May you should sell out and put your money under your mattress, because in the majority of those cases between May and October-almost two-thirds, actually 64% of the time-the market still gained ground between May and October.

In addition, if you look at when the market did decline from May to October, if we were in a bull market we never experienced a double-digit decline over that six-month time period. The average decline was only 1.5%.

So in that perspective, yes, we should expect lower returns in this May through October period. But when you have the blocks in place for a bull market, you don't want to cash out.

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