The distinction between ‘bear market’ and ‘interruption’ is important in understanding and assessing the ultimate upside potential of this cycle. The DJIA had a terrific advance between October 2002 and 2007 of nearly 100%, but when the advance resumed in March 2009 with much of the market’s longer term sector leadership still intact, it soon became apparent that the financial debacle had presented only an interruption of the bullish cycle that began in 2002. The financial-led stock market decline in 2007-2008 ultimately established a major bottom that launched a new chapter in the bull market cycle. It was not a classic bear market in that it neither triggered a sea change in leadership nor ushered in a new economic cycle. It is not simply that the DJIA’s gains since March 2009 have already eclipsed its returns from the first stage of this cycle; the 2007-2008 selling stampede also had lasting effects on investor psyche. This altered psychology has seen investors exercising restraint with capital preservation a key goal. As a result, the market has engaged in regular backing and filling movements that have kept speculation in check while also establishing baseline technical support at incrementally higher levels along the way to record high levels.
The timeline of the bull market was also dramatically extended because of the market events of 2007-2008. In my estimation, the time horizon may have lengthened by some five to seven years, which implies that the cycle may only now be entering its later innings. Historically, it is these later innings that present some of the most exciting opportunities of the entire cycle. The steep and abrupt decline last October may have signaled a turning point for the stock market. The heightened volatility since October may be a harbinger of a shift in market tone that finds investors seeking more aggressive growth stocks with the brightest earnings prospects. In this regard, it may be noteworthy that growth has outpaced value by a small margin since the October 15 selling rout. This is particularly remarkable in view of the headline risk and rapid price excursions which might normally draw investors to the perceived safety of value stocks. While 2015 has begun with expansive and irresolute trading swings, I believe this volatility may be masking technical evidence that stocks are establishing an integral platform from which a robust advance could spring this year. Volatility and the year-to-date declines amid the major indices may also be positioning stocks to respond more positively to better-than-anticipated fourth quarter earnings results based on their prevailing oversold characteristics. Furthermore, I believe the downward momentum in West Texas Intermediate (WTI) crude oil may be finally ebbing and that a recognizable bottom could develop short term. Calls for $40 WTI may prove extreme. Stabilization and recovery in the oil market could have a pronounced, bullish impact on the market from its currently oversold levels.
This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.