StockTake: Investors celebrate bull market’s fifth birthday

Happy fifth birthday, global bull market.

The advance has been led by the US, with the S&P 500 tripling (dividends included) since March 2009. The US bull run has been impressive and is just weeks away from becoming the fifth-longest in history (trumping the 1982-87 advance).

If it makes it to the end of May, it will be the fourth-longest. In terms of percentage gains, it is already fourth on the all-time list.

Valuation wise, the index trades on 18 times trailing earnings, a level that has historically marked bull market tops, according to LPL Financial research.

However, don't assume a top is imminent. If companies deliver on earnings, then valuations will look less stretched. As for the duration and strength of the advance, Bespoke Investment Group notes the index went from 1987 to 2000 without every suffering a 20 per cent decline (the technical definition of a bear market).

Additionally, the S&P 500 fell 19 per cent between April and October 2011, or by 21 per cent if one counts its October 4th intra-day low.

If that was defined as a bear market rather than a correction, then the bull run would appear nowhere near as extended.


Still no top in sight?
Veteran technical analyst Paul Desmond of Lowry's Research suggests further gains await.

The award-winning analyst has done what many regard as the definitive study on historical market tops and says investors need to watch out for specific warnings signs, especially regarding market breadth.

Typically, very few stocks are making new highs by the time markets top out, having been pulled higher by a declining number of large-cap firms.

Roughly one-fifth of stocks will have already suffered 20 per cent declines. Small-cap stocks tend to peak eight months before the top; mid-caps are next to decline, before large-caps finally roll over.

Desmond recently said he was seeing "some early warning signs that the bull market is weakening". However, he told Barry Ritholtz last week that most evidence "continues to suggest a healthy primary uptrend with no end in sight".

This time may be different, who knows.

But whatever one’s opinion about the fundamentals, Desmond’s technical outlook bears consideration.

Skittish investors lose out
Talk about enormous five-year returns is all very well, but how many investors actually stayed invested throughout that time?

Many certainly missed the beginning of the bull market in March 2009. Despite valuations being at a multi-decade low, an American Association of Individual Investors (AAII) poll at the time found bearish sentiment had hit 70 per cent, with just 19 per cent bullish – the most pessimistic reading in history. Investors remained wary, only returning en masse last year, when $172 billion (€123 billion) poured into US funds.

Morningstar data confirm this picture. The incredible market comeback means US funds averaged returns of 7.3 per cent over the last 10 years – not bad, given markets more than halved during the financial crisis.

The typical investor, however, averaged annual returns of just 4.8 per cent.

Others, of course, did even worse, some stubborn bears staying on the sidelines and insisting this is a market bubble ready to burst. It brings to mind blogger Eddy Elfenbein’s definition of a bubble: a bull market in which you don’t have a position.

How regulators get lucky
Employees at the US Securities and Exchange Commission (SEC) appear to be great stock-pickers, according to a new draft academic paper, generating returns on a par with company insiders and being "remarkably good at avoiding losses".

The stock sales tend to come ahead of a share price decline; staff at the regulatory agency “systematically dodge the revelation of bad news in the future”, indicating they are dumping stocks before government investigations are announced.

The explanation is innocent, the SEC said; staff are forced to sell in advance of investigations.

The abnormal profits are just a product of luck.

Perhaps. The academics, however, are about to research if other government employees "engage in similar trading strategies".

The study is at http://goo.gl/Bevgei

Lose the lottery mentality
What are the most destructive investor behaviours? According to a new paper, under-diversification and a "lottery mentality" – a preference for low-priced, high-volatilty stocks – do the most damage.

Using 5,000 European brokerage accounts between 1999 and 2011 to analyse 10 measures of investor behaviour, the authors found that eliminating under-diversification and lottery behaviour would improve average annual returns by 4 per cent and 3 per cent respectively. The quintile of investors who made the least behavioural mistakes enjoyed “markedly better returns”, outperforming the worst quintile by 8.1 per cent per year.

Fixing the problem is easy; stick to diversified funds, the authors say.

The paper is at http://goo.gl/00i3wY