Three Themes For A Secular Bull Market

It is my opinion that the major US markets have entered into a new mega-year bull market, having recently broken through a 14-year technical ceiling that began in 1999. The recent lost decade, which I accurately predicted way back in January 2001 in a Canadian MoneySaver article (visit the MoneySaver archives and read my piece entitled “Bull, Bear, or Neither”) ended after the S&P 500 broke to new highs last August.

Some may argue that instead of a bull market, stocks should be getting ready for a bear market correction. This might make sense, given how far the market has moved lately. True enough, market valuations could be considered relatively high. Moreover, investors currently hold a rather irrational level of enthusiasm for stocks (often signs of a market top)–as evidenced by various investor sentiment surveys that I follow. So let me address the potential for a pending market correction in the nearterm.  Yes, we are due for a normal (i.e., not of the 2001 or 2008 magnitude) bear market correction sooner or later.

One bit of evidence to support a pullback later in 2014 is the potential for a normal cyclical correction. There has been a bull–bear market cycle on the S&P 500 during the past 15 years. I’ve measured the rhythm of this cycle from trough to trough since 1998, and it would appear that the current period between such market low-points is about 5-6 years. Past troughs include the 1998 Asian Contagion trough, the 2002/2003 Tech bubble doublebottom, and the 2009 Great Recession trough.

If you have heard me speak at a conference before, you will know that I do not get too tied up in picking the exact dates where a cycle is due to bottom. Instead, I note a rhythm to the markets, and the current rhythm appears to be a tendency for troughs to occur about every 5-6 years.

If we measure from the last trough in 2009, a 5-6 year period would suggest the next bear market bottom in 2014 or 2015. This suggests a market peak either very soon (the coming months) or at the latest, 2015. Other evidence pointing to the potential of a correction (again, not a crash) possibly as early as Q2 this year include the tendency for market bottoms to occur in the 2nd year of a presidential term. Sid Mokhtari of CIBC World Markets has noted in a research report that years following a 20% gain on the S&P 500 typically have bearish Q2-Q3 returns.

You can get more information on my long-term and near-termed technical outlook, including supporting charts, on my blog (www.smartbounce.ca). Look for the entry entitled “Cyclical correction possible in 2014.”  Given my outlook for a multi-year bull market ahead, any correction that we see in the coming months should probably be viewed as a buying opportunity, rather than a signal to run for the hills.

I am currently focusing on three main investment themes to take advantage of my big-picture bull market prognosis. Theme number one is to buy dividend growth stocks with solid technical uptrends. Stocks that fit this criteria include some (not all) of the pipelines, and the Infrastructure stocks. We own Keyera Pipelines (KEY-T), Pembina Pipelines (PPL-T) and Brookfield Infrastructure (BIP.UN-T) in this space. I also like Inter Pipeline (IPLT), although we don’t hold it at this time.  Theme number two is to look for rotation into new leadership. Texas Instruments (TXN-N) and American International Group (AIG-N) fit this bill. They’ve both broken out of multi-year consolidation patterns that suggest a movement of money into these companies. We own both of them in our equity platform. We also like the Canadian small cap universe. You can buy individual names within the group, or buy the index as a whole via the iShares S&P TSX Small cap index (XCS-T). This sector was the dog’s breakfast since early 2011, but it broke its downtrend around August in 2013. Tearing the index apart, we have identified many constructive stock charts showing early leadership with superb valuations. Retail investors with less capital might be best to stick with the index trade through the iShares Small-capped ETF mentioned above, rather than buying the individual names.

My third theme is to avoid buying or holding stocks that are clearly “rolling over” as they make way for the new market leaders. While not necessarily a bearish call on these stocks, any stocks that are breaking their longtermed trend lines are likely going to take a backseat in performance as we move forward in this stage of the bull market. Here are a few that have broken longer term trend lines, and may be worth selling or avoiding in favor of stocks with better technical profiles. These include most of the big REITs, many Income Trusts, and some of the telecoms. Pipeline giant TransCanada Pipe (PCA-T) along with Enbridge (ENB-T) are two of the pipelines that I would avoid at this time, differing from the bullish pipelines noted above. True, the Keystone project, if approved, may change the fortunes of these stocks but it’s too early to gamble on that potential at this time. I’ll buy them when the potential for that project becomes clearer. On the US side, there are a few stocks displaying technical breakdowns. American stalwart IBM (IBMN) is a good example of a former market leader that has decidedly broken its uptrend. Coca Cola (KO-N) is also starting to show a potential break in trend.

In summary, I believe that the longer term picture is bullish for the US markets (perhaps less so for Canada given the commodity exposure). However, we are due for a mid-term bear market correction beginning sometime this year. Those who take advantage of the current rotation on the markets, and interim corrections along the way, will win the investment game.

Keith Richards, Portfolio Manager, can be contacted at krichards@valuetrend.ca.

Keith Richards may hold positions in the securities mentioned.  Worldsource Securities Inc. – Member: Canadian Investor Protection Fund, and sponsoring investment dealer of Keith Richards. The opinions expressed are those solely of Keith Richards and may not necessarily reflect that of Worldsource Securities, its employees or affiliates. The contents are for information purposes only and do not represent investment advice. ETFs may have exposure to aggressive investment techniques that include leveraging, which magnify gains and losses and can result in greater volatility in value, and be subject to aggressive investment risk and price volatility risk. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. Please read the prospectus before investing.