Let's start by looking longer term.
Cyclical stocks bulls historically end when/with:
Inflation over 4%
10 year treasury yields over 6%
Stock market topping process accompanied by weakening breadth
Yield curve abnormal
Overtightening of interest rates
Whilst these are only guidelines, it should be noted that in Western markets we have some way to go on all, so we might not expect the cyclical stocks bull to end any time soon. Supporting this, as detailed in my post of February 11th, there are multiple tailwinds for stocks:
QE/Pomo until June
Leading indicators are positive and stable
Money supply growing, money velocity stable
Financial conditions index positive
Latest earnings season has delivered a beat rate in excess of the last 3 quarters
Stocks are cheap relative to bonds historically
Stocks are in the presidential cycle sweetspot in 2011, particularly the first 6 months
One thing has changed since that post, which is the bull market sustainability index reading, which now points to a pullback, and I'll come on to that later. So, the environment for stocks is currently positive and we have some tools to measure when the cyclical bull is approaching conclusion, so let's turn to forecasting when that conclusion might be.
The strength of this cyclical bull off the March 2009 low historically suggests this will be a prolonged bull of large returns. Laszlo Brinyi's analysis suggests that it should last around 4.5 years, taking us to 2013. The table below shows how such bull markets typically make 4 phases or quartiles (reluctance, digestion, acceptance, exuberance) and that our first phase from March 2009 through to April 2010 was amongst the strongest of any in history. The second phase typically produces much more mediocre returns than the first and should last roughly to June 2011. This phase has so far seen an increase of around 9% so it may be that consolidation lies ahead rather than a continued run up.
John Hampson, UK
Financial Markets Trading At The Global Macro Level
Future Studies
Forecasting By Amalgamation: Bringing Together All Disciplines That Influence Our Future
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