The U.S. economy shrank in the first quarter. The Russell 2000
index of small companies tumbled nearly 10% this spring.
High-octane "momentum stocks" likewise got clocked. And the bull
market is now the fourth-longest since 1928. Time to sell
Not so fast, says Jim Stack, editor of
InvesTech Market Research Analyst,
who's advising subscribers to put 82% of their investments in
stocks. Stack, in my view, has sound reasons for being bullish.
What's more, his record offers a reason to take his market calls
Calling market turns is a perilous business at best, and Stack
has made mistakes--most significantly becoming bearish too early in
the 1990s. But his long-term record is superior. Over the past 15
years through April 30, the authoritative
Hulbert Financial Digest
reports, Stack's model portfolio returned an annualized 8.5%,
compared with 5.0% annualized for the Wilshire 5000, a measure of
the broad U.S. stock market. Stack was also on target about the
onset of the bear market on October 9, 2007, and about its
conclusion, on March 9, 2009. He's been (correctly) bullish ever
Stack employs both economic data and technical analysis to make
his market prognostications. Here's what he sees now:
Stock market breadth. Many more stocks are rising than falling.
Technicians like Stack read that as a bullish sign. Likewise, far
more stocks are setting new 52-week highs than new lows--another
healthy sign. What's more, an index Stack has compiled of stocks
that he says tend to lead the market has been making new highs.
Market advances are inclined to become increasingly narrow when
bull markets are drawing to a close, technicians believe. Such a
bearish development is nowhere on the horizon, Stack says, despite
the recent weakness in small-cap stocks. The blow-off of
high-octane tech and biotech "story stocks" in March and April,
Stack says, dealt a blow to market excesses. "You need those kinds
of corrections to temper speculation."
A slowly growing but improving economy. Yes, economic growth
remains achingly slow, but Stack sees this as bullish: A slow
recovery makes it less likely that the economy will overheat,
leading to an increase in inflation. But the decline in gross
domestic product in the first quarter at a 1% annualized rate was
almost certainly due to weather.
Data from the Institute for Supply Management surveys show
increasing growth both in the service and manufacturing sectors.
The Conference Board's measures of consumer confidence, CEO
confidence and its leading economic indicators all point to
The market's technical and the positive economic signs suggest
to Stack that the bull market is in no imminent danger of ending.
Historically, he points out, the end of bull markets tend to be
slow, rounded affairs. That means you don't need to sell stocks the
first week the market declines to avoid getting clocked. (New bull
markets, by contrast, typically take off like rockets.)
Not that Stack doesn't see negatives. Here's what worries
The bull market's age. In investing, patterns tend to repeat.
Since 1928, only three bull markets have lasted longer than the
current one, which is nearly 63 months old. "Bull markets don't die
of old age," Stack says, but as time goes on, the odds against
their continuation lengthen.
Housing weakness. Sales of existing homes and other housing
indicators rebounded after the Great Recession ended, but they have
been weak of late. Part of that was due to the bad winter, but
further declines could increase the odds of a recession. Housing
and related spending account for almost 20% of GDP. What's more,
housing can have a big influence on overall consumer confidence.
Even homeowners who don't plan to move tend to cut back on spending
when housing prices fall in their area.
Margin debt. Margin debt, money borrowed in brokerage accounts
(and often used to invest more heavily), has dipped from near
record highs in recent months. High levels of margin show increased
speculation in the market. When margin begins unwinding from high
levels, stocks often fall.
Stack's best guess is that the bull market will end sometime
over the next six to 24 months. What's worse, he expects the next
bear market to be doozy.
From the start of the bull market through June 3, Standard &
Poor's 500-stock index has delivered a total return, including
dividends, of 218% (or 24.7% annualized). Since 1928, every bear
market save one, Stack says, has taken back more than half of the
prior bull market's gains. That's sobering.
What to do now? Rather than selling stocks, Stack recommends
that you emphasize sectors that have historically done well both in
the final 12 months of a bull market and in bear markets: energy
and health care. Stack's recommended portfolio also has big
positions in consumer staples, which often do well in down markets,
and technology, which tends to outperform in the last few months of
Stack currently recommends that fund investors put 82% of their
money into various SPDR-brand, exchange-traded sector funds. His
biggest positions are in Health Care Select Sector SPDR (
), 14%; Consumer Staples Select Sector SPDR (
), 13%; Financial Select Sector SPDR (
), 12%; and Energy Select Sector SPDR (
Frankly, I think Stack's approach is a little too cute. In my
view, the safer course is to stay invested, but load up on stock
funds that invest in lower-risk blue chips that have a history of
holding up well in bear markets.
is an investment adviser in the Washington, D.C., area.