Morning Tack: "Secular Bull Markets"

"In secular bull markets most of the surprises come on the upside!" . . . An old stock market "saw" from the early 1900's

"In secular bull markets most of the surprises come on the upside" is an old stock market "saw" from the early 1900s. Having lived through two secular bull markets, in 54 years of investing and nearly 47 years in this business, this axiom has stood the test of time. So yesterday was another one of those bull market upside surprises. As readers of these missives know, last Thursday our short-term model "spoke," suggesting the next few weeks of trading would be relatively flat as the stock market's internal energy gets rebuilt for another leg to the upside. And, that "call" looked pretty good up until yesterday's rally. In Andrew's and my defense, we did write in last Friday's Morning Tack, as well as communicate in our verbal comments, that:

"Currently, we believe a trading high is due here with a subsequent 'hover' around the recent highs in the offing over the next few weeks. Following that, if correct, there should be another whole new leg to the upside. If our near-term sideways to marginally down 'call' proves wrong, it should prove wrong on the downside as the markets surprise everyone by extending the current rally."

SURPRISE, as yesterday's Dow Delight left the senior index better by ~135 points and the S&P 500 (SPX/2430.06) up ~18 points, both closing at new all-time highs. As always, the media, in search of the causa proxima for said rally, centered on the better than expected ADP Employment Report, a bullish EIA crude oil report, and rumors the U.S. is pulling out of the Paris Accord. To that last point our energy analyst, Pavel Molchanov, writes:

"The Paris Agreement entails some 'paperwork' (reporting and monitoring) requirements, but - contrary to conventional wisdom - it does not create substantive, internationally binding limits on carbon emissions. Whether the U.S. stays in or leaves, it will make no tangible difference for the trajectory of U.S. emissions (Pavel)."

However, the real reason stocks went up yesterday is that "In secular bull markets most of the surprises come on the upside!" So the question now becomes, "Is our near-term 'flat line call' a bad call and was yesterday's rally the start of the new leg to the upside?" Our answer is a resounding "maybe." The first day of a new month has a tendency for reinvestment by various funds, whose upside move can be a head fake.

Nevertheless, about the only negative thing we saw in "Thursday's Triumph" was that the D-J Transportation Average, while up 1.2%, did not make a new all-time high with the D-J Industrials. That is a "potential" Dow Theory upside non-confirmation, although our intermediate/long-term models are decidedly bullish. Also in the "maybe" camp is the fact that our short-term proprietary model did not flip into positive territory yesterday. Accordingly, we will be watching those two indicator closely in the days ahead for the near-term directionality of the stock market, but longer term we continue to believe the secular bull market is alive and well.

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