Some investors worry that a new bear market might soon start, assuming
that one has not already begun.
Middle East events, a long-running European banking crisis and the Japanese nuclear disaster are steadily pounding away at investor confidence. Here at home, investors worry about rising inflation and the
economic effect of the new austerity programme.
It is easy to throw in the towel when faced with a barrage of bad news. Also lurking in the background is the fact that the current bull market has already run for two years.
But, as many investors have learned the hard way, letting emotion trigger a buying or selling decision is often a money-losing strategy. It pays to be influenced by facts and logical judgments, not emotions.
Here is an objective
fact that suggests this
bull market has much further to run in spite of
the fears triggered by recent events.
We are currently enjoying the 19th UK bull market since the end of the first world war, almost 100 years ago. History teaches that they run, on average, for more than three years.
There is also a strong link between the size
of a bull market and
the size of the downturn that precedes it. When
the preceding bear market is of moderate or weak intensity, there is a 50:50 chance that the bull market to follow will
also be weak.
On the other hand, there were six very painful downturns in the last century when prices
fell by at least 37 per cent. Most were much bigger including two 50 per cent drops in the last decade and two 60 per cent declines in the 1930s.
A single element linked these six big downturns. Each bounce-back rally lifted shares by at least
100 per cent. The average gain was 137 per cent.
This steady relationship between big declines
and big bounce-back
rallies in different
decades, and in response
to different economic conditions, is difficult
At the recent peak on February 17, the FTSE 100 had risen 72 per cent above its March 2009 low after a steep decline in 2007-2008. If this bull market follows the historical roadmap,
I anticipate that prices will at least double from that March low of 3530 before the rally eventually ends.
Although my longer-term view remains positive,
I continue to worry about near-term prospects.
To some extent, Middle East news and the perilous state of the European financial system are already reflected in
current prices. But the continuous drip of fresh bad news could trigger further short-term selling. The same is true for Japan’s unfolding
Wall Street’s upcoming first-quarter earnings season is also worth thinking about. Shares rose in the run-up to recent reporting seasons because investors expected results to exceed forecasts. But out-performance is now more difficult because comparative figures from 2010 are very strong.
Unless US investors believe the upcoming earnings season will deliver very good news, they have little incentive to push up prices in the next few weeks. This is important to UK investors because London often follows Wall Street’s lead in the short-run.
So, what are our
near-term prospects? The price graph makes two interesting points. Notice that shares hit several
new highs plus several new lows in the last few months. “Megaphone” patterns like this one
often precede near-term price weakness.
The chart gives me the impression that the recent sell-off was an accident waiting to happen, with last Monday’s headlines from Japan finally providing the trigger.
Predicting upcoming gyrations is a dicey undertaking when investors are responding to breaking news headlines. But the graph shows that two support lines are converging in the 5500 area of the FTSE 100, about 10 per cent below February’s peak. I would be surprised if prices fell much lower unless current events in the Middle East or Japan took a drastic turn for
Stock market historian David Schwartz is an active short-term trader writing about his own trades.
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