5 Surprising Facts About This Bull Market


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As President Barack Obama took office in January 2009, investors were in despair. An economy in dire straits had already led to a free-falling market, and things only got worse in the early months of the year.

Then, quite suddenly, everything changed. The fear-based selling had exhausted itself. And on March 9, 2009, the S&P 500 would reverse course.

The bull market that ensued has surprised even the most bullish investors. Few would have guessed that an economy that never truly recovered from the Great Recession of 2008 would be capable of fueling a 193% gain in the stock market over the next five and a half years.

Here's a look at five surprising facts about this unusual bull market.

1. Nobody Wants To Lock In Profits

In almost any bull market, you'll see a stretch of gains, followed by a modest pullback, which is then followed by more gains. But in this market, there are no pauses.

Though the S&P 500 repeatedly moved above and below its 150-day moving average ( MA ) in the early stages of the bull market, the market now appears to be on autopilot, inching steadily higher with nary a pullback. The fact that the S&P 500 has now remained above its 150-day MA for more than 18 months is truly impressive. Said another way, the S&P 500 has not had a four-day losing streak thus far in 2014. Yet in prior years of this bull market, we saw such pullbacks roughly nine times per year, according to Bloomberg .

2. Nobody Wants To Go Short

Shares held by short sellers represents about 2% of the stock market, according to financial research firm Markit. That's close to the lowest level since 2006. This recent article in Fortune suggests that the dearth of short-selling is a sign of bullishness.

It's not. It's a sign that short selling has gotten too painful.

Many investors that had been inclined to hedge their portfolios with short positions have been burned too many times in this bull market -- and they have no desire to get in front of a moving train like Tesla (Nasdaq: TSLA ) , Chipotle Mexican Grill (NYSE: CMG ) or Netflix (Nasdaq: NFLX ) . The problem with a lack of short selling is a key valuation corrective is gone from the market, and stocks can run in an unimpeded fashion to levels that become hard to justify.

Equally important, such stocks can crater badly if bad news emerges and their valuations snap back like a rubber band.

3. Investors Are Out Of Cash And Borrowing To Buy More Shares

The amount of margin debt on the New York Stock Exchange rose to $464.3 billion in June, right near the all-time high set in February.

Over the past two years, this figure has soared 63%, or $180 billion. In that time, the S&P 500 has risen 43%, implying that margin debt -- in relation to the market's total value -- is moving into the risk zone. The risk, as we saw in 2000 and 2001, is if the market starts going down and margin debts need to be repaid at an accelerating pace.

Source: NYX data

4. No More Corrections

According to Barry Ritholtz, who pens the terrific The Big Picture blog, bull market rallies (since 1945) tend to last an average of 221 days before we see a 10% pullback. And in those rallies, the market tends to move up about 32%.

Well, in the current market, we haven't seen a 10% pullback in more than a thousand days -- and in the three years since, the S&P 500 has risen 77%.

Investors are starting to forget what a correction feels like, and if one occurs in coming quarters, it will be interesting to see if it is viewed as a buying opportunity... or a reason to suspect that this era of terrific gains has come to an end.

5. Earnings Growth Lags The Market

Over the past few years, the S&P 500 is rising at a noticeably faster pace than underlying corporate earnings growth.

As a result, the market's price-to-earnings (P/E) ratio moves ever higher. Indeed the gains thus far in 2014 may already exceed the full-year profit gains for S&P 500 companies. This doesn't signal that the market must drop, but if history is any guide, it suggests that future market gains will be much more muted to give earnings time to catch up.

S&P 500 Earnings Growth vs. Market Gain

Full-year profit estimates will come under fresh attention in five or six weeks: "On average, September is the month with the most negative revisions, as if people get back from summer vacation, go to some conferences, and recognize that dialing back their estimates is prudent," note analysts at Morgan Stanley.

As it stands, analysts currently anticipate aggregate profit growth to be less than 10% this year, and if they revise that figure lower in September, as Morgan Stanley predicts, then the market gains thus far this year have likely already exceeded profit growth.

Risks to Consider: A key hallmark of this bull market is a lack of stop signs. Few exogenous events seem to be capable of knocking the market off its perch. Yet as the market soars ever higher, Nassim Nicholas Taleb's notion of " Black Swans " comes to mind. These unforeseen events typically appear out of the blue.

Action to Take --> Holding an increasing level of cash in your portfolio is no crime. Though you may not fully capture further market gains if you have only a 60% or 70% weighting in stocks, you will at least preserve some capital in a market pullback -- and equally important, you'll have reserve financial firepower to take advantage of such dips.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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This article appears in: Investing , Investing Ideas , Stocks

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