Wednesday, April 27, 2011

Weighing the odds

It's has been a while I did not talk about stock markets. Some of you may think that I've turned bearish. But if you look at my money portfolio, I still stay highly invested. There has been some discomfort level for many people. They took some or a lot money off the table. That is completely understandable because since March 09, 09 till April 26, this bull run is already 787 days old. Has it got more legs to run? Let me borrow 2 charts from bespoke(I made some notes for you to digest).

First the raw data for you to see.

Let me summarize them again. Basically, there are 26 bulls since 1928.

Almost half of the bulls get killed in less than 1 year. If the bulls managed to extend their runs more than 1 year, there is a good chance that another half of them will extend to more than 3 years. Wow! That's a very good odd. That's good but since we already gone past 778 trading days, what is the chance statistically it can extend to another 1 year? We have 1/3 chance.

Looking purely at the numbers without knowing the driving force behind it is not very wise. Let's look at the critical ones. We have all kind of events driving the bulls. But we are only interested in the long bull run. In the 50-60s, The world was in need of rebuilding after WWII. The excesses came in, got corrected in 73-74 bear market. But environment was even tougher due to low growth and persistent high inflation in the mid 70s to early 80s -- but surprisingly the bulls had incredible runs. The world went into adjustment period when Volker hunted down the inflation. After Volker got the job done, tame inflation in early 80s drove the market highers. The longest bull runs was from the early nineties when we have globalization and a period of low inflation plus easy monetary policy. We got severe declined in 2007 - 2009. It was not a very long winter but the degree and the speed of decline got a lot of people killed.

What kind of environment are we getting now?

Global growth is still there? Yes but some worries over China is slowing down. But we can live with lower growth. No recession in sight.

Easy monetary is still there? Checked, no problem.

Inflation is still low? Yes, but this baby inflation will soon turn into rebellious teen with 7 colors on her hair.

Corporate profits still good? So far so good.

Final analysis. Every time the world gone into shock mode, the authorities tend to be cautious and most likely adopting a looser monetary policy. That is normally pro-growth. I'm leaning a strong vote this bull run should run for another 1 year. The question however, are we going to see a deep correction in the next few months? We had one mild pull back recently but I need to start work now. So let me think over this topic over the next long weekend.

No comments: