Here we are in just the third week of 2014 and the media is all over the stalling in the stock market, saying that perhaps we are at the end of the bull stock market that is now in its fifth year.
I’m hearing about the low level of the S&P 500 Volatility Index (VIX), also known as a measure of fear in the stock market. Yes, it’s low and perhaps the stock market is too relaxed, but that doesn’t always imply that we are headed for a stock market correction.
Traders are also concerned with the lack of buying so far in January, which, if it ends in the red, could suggest a down year for stocks based on historical tendencies—albeit, I doubt that.
We are seeing some stalling on the charts, as the new approach to investing this year appears to be one of prudence and not bidding the stock market higher until we see evidence of a healthier economy, stronger jobs creation, and earnings/revenue growth from corporate America.
I’m not surprised by this shift, given the massive stock market gains in 2013.
The impact of the Federal Reserve and its proposed tapering timeline appears to be less of a factor this year, as it is expected that the tapering will continue. The uncertainty surrounding tapering that drove the erratic trading of 2013 is gone; traders are now discounting in the tapering. (See “Stock Market’s Dependence on Easy Money Weakening?”)
My view is that as long as the withdrawal of the bond buying is slow and the economy delivers stronger and steady growth, market participants won’t be that upset.
A slight rise in long-term rates and the 10-year bond yield is not going to hurt the stock market that much, either.
In fact, I like a return to normalcy in the stock market, where gains are determined by the progress of the economy and earnings, and not merely driven by what the Fed does.
On the chart, the S&P 500 shows a clear breakout at the top multiyear resistance level. Now, the breakout may be false due to the lack of active participation as shown by the declining volume, but so far, it has held up pretty well, contrary to the overbought condition.
Some are arguing that the stock market is vulnerable, as it’s in its fifth year of the bull market and interest rates are heading higher around the corner.
Yet take a look at the two charts below. Note the long, extended bull market runs in the previous decades in spite of much higher interest rates that were at times in the double-digits, as shown by the green line in the first chart below.
Chart courtesy of www.StockCharts.com
Stocks steadily rose from 1980 to 2000 before the technology meltdown in early 2000—that’s a 20-year rising stock market. Of course, we will face stock market corrections along the way, but the overall direction could continue to be higher.
Chart courtesy of www.StockCharts.com
And this may be the case at this juncture. We could be in the midst of another extended bull market that could easily last in excess of five years. In fact, this could be the new norm.
In this case, until we see a reversal, investors should be in equities, riding the wave higher. If you want more of a risk-managed strategy, play the continued bull market via the use of bullish call options on the S&P 500, Dow Jones, and NASDAQ.
This article Could This Bull Market Last a Decade—Or Longer? was originally posted at Profit Confidential
