Just One Thing

by Jeffrey Saut of Raymond James, 5/21/18

We have always liked the movie “City Slickers” and particularly one scene. It’s the scene where Curly (Jack Palance) turns to Mitch Robbins (Billy Crystal) and says, “Do you know the secret of life?” The punchline is, “It’s just one thing” (one thing). For investors we agree, all you need to know is just one thing. That thing was pointed out vividly in a book written in the 1920s about a stock operator named Mr. Partridge, often referred to as “Old Turkey” because he was such a shrewd investor. Consequently, many Wall Street wags would ask him, “What do you think I should do in the stock market?” Old Turkey would cock his head to one side, contemplate the question, and with a fatherly smile would say, “You know it's a bull market.” It was as if he were giving you a priceless talisman wrapped up in a million-dollar insurance policy. And currently, the one thing you need to know is that – it is a secular bull market!

Our friends at the invaluable Lowry Research organization recently wrote about this by noting:

From time to time, our commentaries have used a magician as a metaphor for the stock market. That is, one part of the market will serve to distract the audience of investors while the other part does the “magic.” In today’s market, the major price indexes, principally the DJIA and S&P 500, are serving as the distraction while the more significant action is taking place in the broader market.

For example, while most market narratives have been focused on the volatile trading and limited gains in the major price indexes, small cap stocks have been quietly going their own way. In fact, over the past week, both the small cap Russell 2000 Index and S&P 600 Small Cap Index have recorded not only new bull market highs, but also new all-time highs. And, these highs have occurred in broad-based rallies, as both our Operating Companies Only (OCO) and S&P Small Cap Advance-Decline Lines have also reached new bull market and new all-time highs. Since small caps have, historically, been among the first stocks to show developing weakness as a bull market enters its final stages, these new highs in both the small cap price indexes and Advance-Decline Lines suggest an ongoing and healthy primary uptrend showing few signs of age.

While the Russell 2000 (RUT/1626.63) is a good proxy for the overall market (Chart 1), and broke out to the upside in 2013, the Value Line Geometric (VALUG/566.71) is a much broader based index. Studying the attendant chart (Chart 2) one sees that the VALUG just broke-out in September 2017. As our friend Leon Tuey writes:

Many are deeply worried and one of their concerns is the longevity of this bull market. I find the technical structure of the Value Line Geometric Index most intriguing as only in September, 2017, it broke out of a 19-year base. It’s the longest base in the world, except for the NIKKEI (which broke out of a 26-year base). The VALUG is saying that this bull market is still in its infancy.

Plainly, we agree and have said so repeatedly in these reports. As often stated, secular bull markets have three “legs.” We think the first leg began in October 2008 and ended in May 2015. The second leg started in February 2016 when the Royal Bank of Scotland’s strategist said, “Sell everything except high quality bonds.” The second leg is always the longest and strongest. When it ends is unknowable, but if past is prelude the equity markets will go into another upside consolidation, like the one between May 2015 and February 2016, and then breakout to the upside and commence the third leg. To size that, in the 1982 – 2000 secular bull market the third leg began in late 1994 and ended in March of 2000.