A Bull Market – “Long in the Tooth”
Could
Produce Pain for An Unalert Investor
By Leo
Fasciocco - Publisher of www.tickertapedigest.com
There is an old stock market saying: The only
person who sells at the top is a liar!
The current bull market is as they say on the
Street – “long in the tooth.” It has
lasted some 48 months.
The average duration of a bull market
going back to 1932 is 44 months. So, you might say the clock is ticking. One
who has been bullish needs to be very alert.
By the way, the phrase “long in the tooth”
refers to how a horse’s age is determined. As a horse gets older his gums
recede and its teeth look longer. Hence, the phrase “long in the tooth” means
being older.
Most of the time stock market’s don’t just go
straight up and then straight down.
Often times, bull markets form tops for
several months. There is often a churning that takes place. That often fakes
out many investors both bulls and bears.
Going back several years, there was a bull
market top that started to form in 1999. The Dow took 2-1/2 years to complete
its top and then fall. The Nasdaq took just six months.
The bull market top in 2007 took just six
months for the Dow and four months for the Nasdaq. That was very quick.
Keeping an eye on the trend of the general
market averages is of course important.
An investor needs to be watching for days in
which volume increases significantly and the stock market averages make very
little upward progress. This can be covered afterwards by a few days in which
the market averages rise.
What one is seeing is subtle distribution.
This pattern could go on for several weeks before there is an eventual
breakdown in the averages sending them in a clear down trend.
The past few years all eyes have been fixed on
the Federal Reserve’s accommodation of monetary policy. The low interest rates
have pushed investors to stocks and other types of securities seeking a better
return.
The
accommodative policy is bullish, but when the Fed stops or slows this policy it
could be a harbinger that there will be a shift in the flow of funds away from
equities.
The monthly chart of the Nasdaq (see chart)
shows three bull market phases. The first one peaked in 2000 as the Nasdaq had
a climactic blow off and then came tumbling down.
The second bull market peak came in 2007 and
that was followed by a quick selloff due to the financial crisis of 2008.
Finally, the current bull market remains in play but is very extended.
However, most important to an investor is
being extremely watchful of the key fundamental and technical signals of their
individual stocks.
Here are some clues and nuances one should be
on guard concerning fundamentals.
One must be on the look out if a company’s:
-
Earnings comparisons turn negative.
-
Earnings are disappointing to the Street
-
Earnings growth rate is “decelerating.”
On point one, obviously, if a company’s
earnings decline from a year ago that is most likely bearish. Most
institutional investors want growth in earnings. That draws them to a stock. If
it is not there, they look elsewhere. So, a decline in quarterly earnings is a
bearish sign.
Secondly, a quarterly earnings
disappointment is often a wicked bearish sign. There is an old saying one money
manager once told me it is called the “roach theory.” His point: “If there is
one bit of bad news, most likely there will be more to come.”
Finally, one of the most subtle of all
earnings patterns to look for is a “deceleration in quarterly earnings
growth.” This is often seen in leading
growth stocks. They could be the star of a bull market, but if the percentage
of quarterly earnings growth starts to trend lower watch out!
One can see that in the case of former big
cap market leader Apple Inc. (AAPL)
The stock had a fantastic run riding the wave
of successful new products like the iphone and ipad. Sales were strong and
earnings growth was great, especially for such a large firm.
However, Apple’s stock peaked in 2012 and fell
back from $660 in September of 2012 to $400 by March of 2013.
Apple’s quarterly earnings growth for the
fiscal year ending in 2012 reads like this: up 116% in the fiscal first
quarter, up 92% in the fiscal second quarter, up 20% in the fiscal third
quarter – when the stock broke to the downside
- and up 23% in the fourth quarter.
Notice one can see there was a “significant
deceleration in quarterly earnings growth” in the third fiscal quarter of 2012.
That was the key fundamental bearish signal.
Then, Apple’s quarterly results in fiscal
2013 showed flat earnings in the fiscal first quarter, an 18% decline in the
fiscal second quarter, a 20% decline in the fiscal third quarter and a 5%
decline in the fiscal fourth quarter.
So, the deceleration in quarterly earnings in
the fiscal second quarter of 2012 was the key fundamental signal for bulls to
say adios.
Apple’s stock has since lifted a bit but it
remains to be seen what the stock will do. Earnings growth is now single digit.
So, it may not be that attractive to growth investors.
This is a key bearish fundamental earnings
pattern investors need to be on the look out for. It is often overlooked.