Switzer on Saturday

Stocks to rise 9% over the next six months

Founder and Publisher of the Switzer Report
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Last week, Investor Mutual’s Anton Tagliaferro was quoted saying he was expecting a correction, which, given our 25% plus rise since November 2012 on the stock market, does not look outlandish. But against that, Richard Coppleson at Goldman Sachs went stampeding into big bull territory.

Here come the bulls

This is what he said: “One of the best US indicators is indicating a 9.75% rise over the next six months… it has happened an unprecedented five times in 2013 and has been SPOT ON.”

He added the following to ram home his point: “Anyone who cannot see that the US is in a multi-year bull market does not understand what is going on around them.”

As one of my advisers pointed out — “blimey that’s bullish!”

And it is, but five times in a year of the Dow rising nine days out of 10 – that’s the indicator he talked about – is an intriguing one. He says it is “very, very rare” for the market to go up 90% of the time, and throws in Goldman Sachs analysis that the US is in for “two golden years” of growth of 3%.

He also argues, like I have, that not only is the USA coming good, but Europe is showing “green shoots” – my words, not his.

In fact, he is more excited coming up with: “In Europe – the worst is over and the worst recession in 60 years is ending…we are going to see a massive amount of cash switching out of bonds and a percentage of this will be going into the equity market.”

The correction case

Okay, I can buy this, but what about an overdue correction, as Anton expects?

Let’s define what we’re talking about – a stock market correction is a drop of 10% or more of a relevant index. These are usually temporary in a general uptrend for share prices.

History shows that a correction generally comes when markets are closing lower for a period, but a shock event can break this pattern. So, on present market high closings, a correction should not be imminent, unless a left-field event bobs up.

In September, Forbes.com thought it was time to talk corrections but, to date, it has not shown up. That said, it is worth looking at their arguments for a correction. They talk about 5% corrections, which puts them at odds with finance departments.

In August, Wall Street had a 4.6% pullback and so it did not even pass their 5% test. Jim Stack of InvesTech Research, who wrote the piece in Forbes, called it one of the most nervous market recoveries since WWII. He did not say why, but I suspect he’s right. In fact, it could be one reason why this bull market goes longer than most – the stampede to be a bull is slower than the past.

Corrections occur about 7.6 months apart but, as Stack shows, in the first year of this bull market – 2009 – there were five corrections!

After that, corrections went back to the historical pattern. To date, the Yanks have had 11 corrections of 5% plus and two over 10%.

The not-so-petite lady isn’t singing yet

Now what worries me a little is that this is one of the longest bull markets since the Great Depression, going over four and a half years. The average is 3.8 years, but five of the past 16 bull markets have beaten the 4.5 year benchmark.

Before you get too jumpy, there has also been a nine year plus bull market and six as well as seven plus ones.

The lesson from past bull markets is that corrections increase in frequency as they get towards their end and so, given our lack of corrections lately, it suggests we have some time to go before the fat lady sings. However, it probably means a correction is way overdue.

But it’s not going to be easy to play the correction frequency test to work out when you get out of the market. Stack points out that in the 1990-2000 bull market, there were “10% corrections in each of the three years prior to the final peak.”

My conclusion

So what do I think? Let’s go back to the legendary man of money, Sir John Templeman, who advised: “Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

I think we are in the optimism stage, where money is coming out of bonds and term deposits, but there is still a lot of money on the sidelines. I think this bull market will be another biggie but I will watch the correction tests because there are a lot of unknowns out there — economic recoveries, debt levels, a crazy US Congress and what a GFC, as well as a near miss with a Great Depression, can do to a global economy and the financial system.

But the above analysis does make it believable when Coppleson persuasively argues that he can see a 9.75% market rise over the next six months.

That looks like a safe bet.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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