The 4 Stages of a Bull Market

I 1st wrote about this in late March of Y 2009, then again in April 2013 and now again in April 2020 saying this again and again, “more money is likely made from Bull Markets than any other market action. Careful investing in Bull Markets is the Key to long term investment success.”

I am optimistic about this next Bull Market leg, but more in that later, stay tuned…

A Bull Market is an extended period of time when the stock indexes regularly notch higher highs.

It is composed of 4 periods, 2 of the 4 are pretty easy to identify, but the 1st and 4th periods are blended, featuring Bull and Bear cycles, they can be hard to ID for most analysts because there are lots of conflicts. Grays as opposed to Black and Whites.

The Grays are Key reversals and not often clear to analysts and for sure not the civilian investors.

They look pretty evident in 20/20 hindsight, but Bull markets are not always clear unfolding. Think, 2 steps forward and 1 step back and look like there is no direction.

The data show that during the Bull cycle, 90% of all stocks will slowly follow the 100-Day MA’s North. Sometimes Bull cycles develop strong trends ID’d by continuation patterns.

Stage 1

Stage 1 of a Bull Market is marked by little or no confidence and quiet accumulation by professionals participants, this current Bull market began exactly at 1.00p ET on 9 March 2009. it is next to impossible to identify the event when it. Bargain prices mark Stage 1, the beginning of accumulation by the professional value buyers and institutions.

The leading money managers begin to accumulate based on the fundamentals. The general public is fed up with the stock market, but many companies with solid business strategies and strong competitive positions in their sectors offer real potential for price appreciation.

At this point most who found themselves in desperate need to sell have capitulated, the supply is diminished. So, to get strong stocks, traders now have to start paying higher prices to acquire them.

Caution is driving the this Bus.

Values are now good and institutions are quietly in accumulation mode, but the public is  in shock and will not be back into stocks until stocks see higher prices, much higher prices. The bottom pickers were hammered on the way down, the plays ranks have limited thinned considerably.

Most people consider price as the determining factor that indicates the end of a Bear Market, but it is time and fundamentals.

This is why Bottoms take more time to form than it does for Tops to Water Fall. This is really apparent at Stage 1 of a Bull Market, and this is why it is hard to tell when you are in Stage 1 of a Bull cycle and not in a Bear Market rally aka a Bear Trap.

So, when look for individual stock picks during this frame, it is a good practice to watch for those with good P/E ratios and ROE values when they cross their 200-Day MAs.

Stage 2

In the 2nd Stage of a  Bull Market, stock prices have been rising for several months now years and the mark-up is ready to really begin. Market-leading equities are beginning to cross their 200-Day MAs. And this is the time to buy the dips and ride the rallies North.

Here, market newsletter writers and TV pundits to the contrary, there is no difficulty  in picking stocks in this frame. But you must tune out the Noise. 

Participants can just about select any stock and it will appreciate, the Big Q is how much?  When looking for individual stock picks during this time, review the new highs from the most-active lists.

Money follows rallies, greed is back, and people are starting to think of the stock market as a wealth generator again.

So, now there is competition by the public for a reduced supply of shares, accumulation forces prices higher. Econ 101, Supply Vs Demand.

In here some participants are starting to post strong profits because they bought early and held on. But, the public has not yet join the action, Bull cycles take time to get going in earnest.

The market’s leaders are rising to the top and the media loves them.

Mutual fund inflows are on the rise, as it becomes apparent the market is in recovery mode. The Dow Jones Transportation Index has clearly reversed.

The market is now being driven by liquidity. Rallies are not caused by inflows,  inflows are the result of rallies, and rallies are the result of a series of higher highs. Greed is setting in.

It is not public demand that causes rising prices, but the rising prices that causes public demand. This period normally concludes by a significant retracement as the market pauses to refresh and consolidate its gainers, the Bulls rests and then get up and continues to run. On this retrace it is important that new bases have to built for the Bull run to continue and align for Stage 3.

 Greed is driving this  Bus.

Stage 3

Now, stock prices are moving North quickly. Cocktail Party Talk is now Stock Party Talk,  people with “hot tips” abound. Most participants are now on the lookout for “ easy money” and virtually no attention is paid to the underlying fundamentals of the broad market.

P/E ratios extend, no one pays attention.  The “new” stock market experts look a all traditional data Fundamental and Technical with a “Jaundiced Eye.”

Historical data are denied, the Mantra becomes, this time it is different, the media fans the fire.

New books are published on how to make fortunes in the stock market become common place, fundamentals are sidelined, folks do not care once more. This is now, that was then is the mood.

The initial public offering (IPO) phase come back to the market. During Stage 3 lots of new companies are formed to satisfy a public appetite for stocks of all shapes kinds.

 The reason is simple: now there is more money to invest than shares available to sell.

Along with the IPO comes a merger-mania, and leveraged buy-outs run are again the darlings of corporate finance. The availability of leverage money makes this happen.

Many companies are enjoying expanded stock prices (currency) to aid in the acquisition of any target that  sparks corporate interest.

So, long as companies can convince others that their stock prices are real, acquisitions are easy.

Public Relations and Market Spin are driving this Bus.

During this stage may issues notch their all time highs, then reverse before the overall market shows any signs of reversal. This action leads to Stage 4 of the Bull Market and distribution begins.

The professionals start to distribute some of the shares that were acquired in Stage 1 at huge profits to the civilian investors and speculators.

Stage 4

The Key factors leading the Stage 4 of the Bull Market, and its coming fall were rampant speculation, and huge leverage aided by easy credit, all 1 had to be is “warm’ to get money from brokerages and banks to play the stock game. The most unsophisticated market participants are not players.

Stage 4 is full of conflict and confusion.

We read stuff like,  “if you would have put $10,000 in the market 50 yrs ago and never sold, you’d be a multi-millionaire today” are common, as the market place develops its topping theme, seizes it and goes “Mad” behind it on the waves of easy credit and greed as the general public piles more and more money on to the fire.

Tracking market history over hundreds of years sees bubble after bubble after bubble.

The data shows one about every 20 yrs or so. Such bubbles are always connected to corrective recessions or depressions but a new bubble always rises from the rubble, as a new theme develops. That is the way of the financial world.

We have seen the tech boom, where any company that had “tech” in its name was viewed as an instant road to riches.

Then came the “Nifty 50” where buying any of 50 blue chips stocks was considered a guaranteed path to wealth.

The “conglomerate boom” was so volatile that it became the main concern of the academia that America would end up with only 5 to 10 public companies.

 The “Internet boom” where all of the brick and mortar stores were going to close and people were going to buy everything via the world wide web, along this road there were several real estate and commodity bubbles that burst too.

Overall a Bull Market resolves not because of some tumultuous occurrence or the result of a mature market, as the civilians have come to believe, but as the result of the inability for more and more money entering the market. Fewer and fewer players, less and less money, Bull Market over, Bear Market sets up and the Bull/Bear cycle is ready begin anew.

This the Stage of  high volume, high volatility and extreme vacillation, fear is in the air. The VIX is the tell.

Profits made in Stages 2 and 3 confirm the belief of most investors folk that the Bull Market will continue forever.

For these players the start of the coming fall is seen as a huge buying opportunity. The fact is that those who see lower prices as bargains are now the only ones sustaining the Bull Market. As prices go lower, the professional traders sell into every rally.

Greedy dopes are driving this Bus.

Note: when the financial press becomes really Bullish, but the cumulative advance/decline lines on the weekly chart of the indexes happen, savvy participants tighten their sell stops, reduce their exposure and tread prudently.

Prudence is the watch word in here

When stock prices begin to print irrationally and the oscillators do not act right, it is time to be careful.

Extreme vacillation of price usually indicates that something is really out of balance. It is time to be wary of a market that looks unwilling to print decent charts.

If a market does not settle down, it is likely coming apart.

Vacillation of the larger market indicates that something is wrong, but it will not be apparent to many of the uninitiated yet.

When we see extreme vacillation in the broader market, it is a good time in the game to beware. When the professionals profess the market is not right, they are usually on the point, but the public will not care or take heed, they are in for a “butch haircut.”

Over the past 100 yrs+ the length of the average Bull Market is about 40 months and in Bull Markets, about 90% of all good stocks follow the 100-Day MA North.

This Bull Market is the longest in history, 11+ yrs.

Pay attention, the name of this game is to make money.

Stay tuned for why I am optimistic about the extension of this Bull Market.

Have a healthy happy Easter and Passover weekend, stay home, Keep the Faith!

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