Tuesday, July 8, 2014

The Four Phases of the Bull Market (excerpt)

In 1725, Antonio Vivaldi composed “The Four Seasons,” a set of four violin concertos. The sounds of each concerto resembles its respective season. So for example, “Winter” is punctuated with pizzicato notes from the high strings, suggesting icy rain. “Summer” sounds like a thunderstorm in its final movement, which is often called “Storm.”

One of the great virtuosos of the investment business was Sir John Templeton. He observed that bull markets experience four phases: pessimism, skepticism, optimism, and euphoria. Similarly, my friend Laszlo Birinyi has also identified four phases: reluctance, digestion, acceptance, and exuberance.

Where are we now in the current bull market? In my opinion, we are moving from the third to the fourth phase for the S&P 500. The first phase started on March 9, 2009 and ended after the second and worst correction of the bull market, on October 3, 2011. The second phase included three minor corrections, with the last one ending on June 1, 2012. The third phase has had no corrections and is probably coming to an end now. It may be setting the stage for what can also be called the “melt-up” phase. The start of the fourth phase probably coincided with the bottom in the “internal correction” of the momentum stocks on May 8. A chart of the S&P 500’s forward P/E can also be used to identify these four phases.

Today's Morning Briefing: The Fourth Phase. (1) Vivaldi, Templeton, and Birinyi. (2) The four phases of a bull market. (3) Transitioning from the third to the fourth phase. (4) Exuberance fueled by buybacks, M&A, and Yellen. (5) Equity fund flows entering the fourth phase. (6) Industry analysts are exuberant about earnings. (7) Can the secular bull survive a melt-up/meltdown scenario? (8) Bear market triggers. (9) Sectors leading the earnings parade. (10) Global growth remains slow according to German data. (11) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

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