‘Bull Market’ Getting Closer as Name for This US Stock Rise

Friday, March 19, 2010

So, when is the announcement going to take place that we are officially in a bull market? Doesn’t twelve months of significantly rising prices qualify? Judging by an internet search for “bull market,” the phrase is rarely used – at least in a positive way. An example of an alternative use is a CNBC segment titled “Bull Market or BS?” (BS was the conclusion.) But that may soon change…

The Wall Street Journal has been reticent to use the “bull market” label. Articles say yes, the market has gone up, but it doesn’t look or feel like a real bull market.

  • “Stocks’ Run Draws Yawns from Buyers” (March 8 )
  • “Worries Rebound on Bull’s Birthday” (March 9)
  • “Bull Market? Stock Funds’ Flows Don’t Really Show It” (March 11)

Note why there is trouble using the descriptor, “bull market” – yawns, worries and lack of fund flows.

Well, on Wednesday, it happened – sort of: “Money Flowing into Stocks Is Form of Reverse Capitulation” (The Wall Street Journal, March 17). This article highlights a key link between performance and investor action: the US stock market continues to show strength and that is producing signs that are harder for investors to ignore. And those signs could be the catalyst to turning on investor interest, optimism and positive flows. [Note – This article did not make it into the printed paper, but can be found online here.]

How large are these potential flows? Very. Investors, both individuals and institutions, are greatly underweighted in US stocks. The currently-derided 60% equities / 40% fixed-income allocation is still appropriate for many investors. The validity of 60/40 deserves a longer explanation, but the point is that the mix provides a future return/risk balance that fits the average investor’s needs and desires (AKA “risk profile”).

So, when will flows into US stocks start in earnest?

I believe the time could be very near (see my article “Long Ignored, ’Upside Risk’ Returns – Is ‘Buyers’ Panic’ Next?” – March 5).

A good measure is the weekly net flows into mutual funds. Here are two graphs showing the latest Investment Company Institute’s data: monthly net flows through January and weekly net flows through March 10.

Note how the steady net outflows from US stock funds are showing signs of abating. Three of the past four weeks through March 10 had positive inflows, albeit the first two were small. Chances are the week ended March 17 will show a decent inflow given the stock market’s steady rise for the period.

So, we could be seeing the beginning of investor enthusiasm for US stocks, just the thing to give this market the label it deserves: “bull market.”

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