When did the Bull Market start?

Kids, the charts below will show you the turmoil of the years. Enjoy the notes attached to each.


1st Half 2011

2nd Half 2011

1st Half 2012

2nd Half 2012

1st Half 2013




2nd Half 2013

 

As you can see from the above, fear and greed can cause enormous swings daily. We often forget how dfficult riding a bull market and navigating the moves actually are. History is kind to an overall trend, after all. There is no way of playing every nuance in a market at any given time.

For me, the Bull Market started in October 2011, the reasons for which are apparent with the notes. The market in October 2011 became a discounting mechanism for the fist time since 2007. Healthy markets are always primed with a dose of skepticism which allows for upside suprises at a time in the future. This is as precisely what I was noting during the summer of 2011 into the October. A broken market which was not discounting, morphing to a healthy market that was. Do not get drawn in by those that suggest the bull market started in March 2009, the price of SPX just bottomed then. If you manage to speak to some veterans of the 70's and 80's they will happily remind you that just because price bottomed, it did not necessarily mean the start of the bull market was at the same time.

The detail on the above charts are noted purely because I cant hold all the minutae and I needed a few reminders along the road.

As it pertains to remembering dates, remember Mum's b'day, it's important!!!

Queen takes Pawn

What does a growth scare look like?

Kids, it's not all bad, no matter what others say.

There are times that stock markets will react in ways you were not expecting. There are other times when they react exactly how you expect! What does that prove though? It proves that the stock market is almost a living and breathing creature. It is a reflection of all participants thought in one place at any onetime. The right, the wrong, the informed, the not so well informed. What you will try to do is be more informed than most, that way you try to stack the cards in your favour.

You can see such moves in the early part of 2014.

When the Fed finally moved in December, the ramifications were pretty clear, things change. The issue is, what things?  It was Emerging Markets last week. Anything with Emerging Market exposure at some point last week had a bad time. Then, some poor data from the US had people fighting over how bad a growth scare would be.

Let's look at growth scares. They come in all forms, they can be triggered by any piece of data at any time. However, not all growth scares are created equal. The nastiest US growth scares usually start from the bond market. When bond yields rise too fast, there is every reason to sit up quickly and take notice. The trouble with yields moving higher quickly is all about positioning, that is mortgages, convexity, hedging instruments and how people can get offside too fast. When people say something as bland as "too far too fast", it means something in bond land!

Do not ever underestimate the power of the bond market during these times, they rule.

What about other growth scares triggered by events we couldn't even think about? They are all navigable using the panic days that have been discussed in earlier posts. You just have to keep your head while all around are losing theirs. You will be pleasantly suprised at the benefits of buying panic in a bull market.

There will always be panic, there will always be someone trying to convince you this is 1929, 1974, 1987 or 2008-9 all over again. Those events are extremely rare and shouldn't be counted upon to repeat regularly.

Do not ever get upset that a growth scare threw you from a bull market, that is precisely what they are intended to do, you will sell what you love, buy it back higher and kick yourself for being so trigger happy. You should, it's a great learning experience, it has happened to me more often than I can tell you or care to admit.

Try to understand the cycles that you are in, they are remarkable. They are repeatable and very rewarding.

Over time, you will trust your instincts more than the musings of lightweight reporting and young inexperienced professionals. With some luck, you will recognize the genius that actually is the stock market itself and the language that it speaks, it's a journey of ambition as much as anything else. Keep a level head and clear vision, they will serve you when the growth scares are encountered.

Always strive to learn from these episodes, keep your balance, understand the emotions. It's the same as your skiing, fear is there to learn from. You have mastered some lessons already. Mum and I continue to be amazed at your progress.....

Queen takes Pawn

What do you know about cycles? Are they predictable?

Kids, that's a great question and one that is often overlooked....

If there is one thing that is certain in the world, it is that cycles are inevitable. Not every cycle looks the same, not every cycle is as predictable as the last one. Human behaviour is the underlying cause for cycles, of that I have no doubt.....

The best historical evidence of cycles are the Empires. Greek, Roman, Ottoman, Persian, British to name just a few. They are littered with similar facts and waves of success and in all cases, decline. There were significantly different reasons why the Empires came about. The British Empire was one of Naval warfare and success. The Romans won on land and Sea (Europe/Meditteranean/Egypt), the Greeks on the Ocean (but locally), you get the point. Learning from these cycles is of the utmost importance to understand the potential pitfalls of the future.

The most recent cycle for the US had the hallmarks of 1907 with a very similar financial crisis. If you want to read a quick book about it click the link. Was it predictable? If you were looking in the right place it was. I looked at the yield curve, it helped me, not others (human behaviour at its' finest). Some people looked at the source of financial leverage and could see a serious issue. The annecdote that stands out, that I couldnt understand completely, was how everyone was renovating their kitchens for gigantic sums of money, surely that couldnt be right. As it turned out, it wasn't.


Yield curve chart

The chart above is a picture perfect cycle chart, peaks and troughs.....wonderful.

Consumer Confidence



As you can see from consumer confidence, the peaks and troughs are gigantic.They are not quite as priceless as the yield curve, but it does show human nature through good and bad times. This can also be seen in Wages below.

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There are also cycles within cycles. This is best seen with stock markets and stock market behaviour. Below are the conditions that I like to note.....

Phase I:
Early cycle sectors include: Transports, Semis, Finance, Retail (there are others). I class this part of a bull market as PHASE I
This phase has been well discussed and documented, it is the predictive phase without solid evidence that it will happen. The rising tide has a habit of raising all boats. Consumers become more confident, spending habits start to return and populations start to finally see some benefits of better economic news in jobs. The moves are violent, sometimes eye-watering. If the market is discounting future bad news, you know you are on the right side. SPX likely outpaces Russel 2000.

Phase II:
The next phase becomes quite tricky to predict and navigate. Phase II sees spending habits return to a cyclical pattern. Spend some money at christmas, pay off the credit card in January through March. You also see some bigger ticket items being bought at the expense of other discretionary purchases. For instance, if you need a new car, you will source the money from the same pot of money, but it means you wont necessarily spend on a new garage door. Buying a house, sure, but leave some of the interior decorations for another time, including the new dining set! Again, you get the point. Wallet size starts to grow, but previous experience dictates you don't want to overstretch. At this point breakouts are the only serious playable idea. New highs are rewarding. Companies that disappoint will not reward capital. Russel 2000 likely outpaces SPX

Phase III:The real fun is Phase III. The shackles now come off. You can see behaviour change dramatically, spending habits change dramatically. New kitchens are the norm (2007). Buying Internet stocks on monday to sell on friday to finance a boat on saturday (1999). Clamouring for Conglomerates (1987) becomes the dinner party conversation. There are sizeable wins to be had from such behaviour with equivalent pitfalls to avoid at the same time. Do not be afraid to enjoy these times, they are fun, but it's time to be a little more prudent as you were successful in Phase I and II. Chaos trading as Russel 2000 will likely outpace SPX to start then turn tail as growth prospects start diminishing.
The illustration below is an excellent representation of the above from Fidelity....

 

The most interesting part of cycles is you dont have to be an expert to see them. If you look around and take the temperature of behaviour, there is every chance that your experiences are just as good as reading from a text-book or listening to an "expert". There are plenty of "Cycle Theories" ranging from Kondratieff, Fractals, Cyclical, Secular, 17.6year cycle, Elliot Wave, Fibonacci to name just a few. All have their merits and followers, most will work when back-tested and with hindsight! Be warned, there isn't a magic bullet and nobody has a dominant success rate.

The most wonderful time in cycles, as in life, is when you find yourself looking to the stars rather than staring at your feet. It's an uplifting feeling when you finally make that transition, as most will atest.

Queen takes Pawn

Long fun, short asteroids.....

Kids, sometimes it pays to enjoy time.....

Previous posts have already noted what 2014 could look like for stock markets.

Previous posts have looked at Fed changing stance and risk free rate of return. 

Previous posts have also detailed how to stay on a bull market, even though it's nearly impossible to do, I've been thrown off twice and bought back at higher levels!!

This post is more about your state of mind as the world turns.

Over the past few years, you kids have grown and Mum and I have worried endlessly about everything imaginable! Whether that worry was justified ( sometimes it was), or not is a mute point, parents do that. However, this year is different. Why?

Let me list some reasons:

1) stock markets can go up or down, but I'm pretty sure we aren't repeating 2008-2011.

2) watching, researching and trying to predict financial asteroids is time and effort consuming. The world isn't ending.

3) worrying over living isn't an excuse to not look around and enjoy life as it is being led.

4) having fun is so much more important than not!

5) I continue to see great and talented people trying new avenues for business and enjoying the unpredictability of the road they travel.

Asteroid watching and why you don't have to....

1) as long as you understand asteroids exist, you can more often than not discount them.

2) asteroids aren't actually the problem, it's the unseen bumps that cause your balance to be lost.

3) loss of balance feels like a tidal wave

4) tidal waves are not asteroids

5) sometimes there just isn't an issue. Sometimes you made the issue yourself!

Yep, that's right, if you are looking for an issue, you can see something that actually isn't there! Trying to minimize these fears is what will make time so much more productive and fun. Many people throughout history have called for complete disasters that haven't appeared and yet for every 1000 of those predictions, people remember the 1 that actually happened. Even a broken clock is right twice a day...

I've recently been enamored with "experts" arguing amongst themselves about the past. Why has this interested me? Well, that sort of points out that the risks that were so evident in previous years aren't there now or are hidden in a different place where these "experts" aren't looking, hence the arguments over history. 

My telescope is watching the following:

Emerging markets, in particular currencies......not an issue 

Commodity spikes, in particular......not an issue

Bond market.....2s anchored, 10s a source of liquidity......not an issue

There is every chance I'm missing something, but from what I can see, read and anticipate, it sure looks like "long fun, short asteroids" is the right stance.

As you continue to put your work in, that work actually becomes easier and less time consuming (think homework!). Now think about the effort to ski, the more effort, the easier! Simples really, but it takes a step back sometimes to smile an recognize the process. Don't underestimate the ability of chaos and the unpredictability of life. As the world turns though there are times to embrace the "here and now", this is one of those times.....

While you are it, give Mum a kiss, she deserves it.

Queen takes pawn