If you based your investment decision only on the financial media and market pundits, you would most likely shy away from the market. After all, “The market is overbought,” “The state of the economy doesn’t support current stock prices” and “The next market crash is just around the corner.” The market should undergo a serious correction at the very least. But should it?
This situation reminds us a famous and absurdist play by Samuel Beckett, “Waiting for Godot,” where the two main characters, Vladimir and Estragon, wait endlessly and in vain for the arrival of someone named Godot. What an absurdity it has become! For the last few months, investors and market observers have become obsessed with a correction, sitting on cash and waiting for its arrival.
It is not that the market doesn’t need a correction; of course it does. In fact, given the recent advances in some stocks and sectors, a correction would fit perfectly. Unfortunately, that is not how a bull market operates, especially the first one in a brand new secular bullish cycle. What a start to a new long-term cycle it has been! The market has been on the rise for the last 32 months without a 10% pullback – a concern for many. However, history shows that those who are waiting for a pullback to arrive shortly may well be “Waiting for Godot.” During the 1990-1997 run, the market rallied for 82 months without a 10% pullback.
It is unlikely that the market will repeat this record; however, investors must keep in mind that the current advance was preceded by a very severe bear market and it is the first major bull market in a brand new secular bullish cycle. This once-per-generation cyclical occurrence may well provide the stock market with a very strong tailwind.
Given this favourable cyclical setup, why are investors shunning stocks? Investors’ severely damaged psyche might play a role. During the 2000- 2010 period, the stock market underwent a secular (long-term) bear market sprinkled with two huge sell-offs. Such a long period of volatility and distress has certainly had an effect on investors. Many abandoned investing altogether, some became extremely cautious about the market, while others subscribed to the notion of “another crash is just around the corner.” The recent study published by the Financial Analysts Journal shows that investors are keeping the lowest percentage of their portfolios in stocks in over half a century! It is even lower than in the late 1970s, just before the 1980-2000 super bull began.
While for some these statistics could be alarming, given the early stage of a new secular (long-term) bull cycle, it is not unusual. In fact, over the next decade, along with rising stock prices, public interest in the stock market should rise as well – as happened in the late 80s and 90s. Those who recognize this change and invest in stocks early should reap the most benefits.
While resource-based stocks (hard assets) led the last long-term cycle, the new cycle has a new leader – technology (soft assets). The majority of tech stocks underwent a ten-year repair process, which consisted of: (1) a complete change of shareholders – from weak hands to strong hands, and (2) building lengthy base patterns pointing to significantly higher targets. Many of these stocks have had huge breakouts from their base patterns and are now leading the market advance. Given the size of their bases, one could conclude that the technology sector may well lead the current secular bull market for many years to come.
The beginnings of a new bullish secular cycle are often mistaken as a continuation of the old. Investors tired of years of volatility and sell-offs are becoming wary of investing and often miss new opportunities. However, charts don’t have emotions and they are clearly pointing to a new era (just as in the early ‘00s charts pointed to a new bull market in Gold). Technology has embarked on a new multi-year bull market. It means any cyclical (shorter-term) declines should be viewed as buying opportunities.
The advances of the last few months in many technology stocks has brought many of them away from their rising 200-day moving averages. Such a severe discrepancy can persist for extended periods in a bull market. The longer an overbought condition exists, however, the more extensive the subsequent correction. At the same time, stocks near their 40wMA should be the first choice for purchase – especially those that have recently broken out or are on the verge of a breakout. Watch this space for more detailed info.
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