Bull Market – Are we in One

The first bull market I participated in was the Dot Com Bubble. It was where I made my first 10 baggers and 100 baggers even though to be honest I was as clueless as the next person around – or maybe not that much for I was able to squirrel away a bit of the profits and one that came in handy when I decided to become a stock broker a couple of years later.

Since then we have had two glorious bull markets – the first being from 2003 to 2008 and the next from 2013 to 2018. Five year bull markets are rare and offer great opportunities to really up the game and yet looking back, I more or less made barely anything. 

While my first million was made due to lack of knowledge, the reason I could not participate in the next two bull markets which were actually more broader and much longer was because I had moved from being a novice to a expert and one who clearly felt that there was something wrong with this market and it was doomed to fail. Thanks to the company I kept during those days, any doubts were quickly dispelled by those who seemed to be more bearish than me and who have even better convincing answers than what I could offer.

There is this story I remember having read that talked about how Churchill when the tide of the War (the Second World War) had shifted to the side of the Allies changed his experienced Generals for they were experienced in Defense while what he required that point was Offense even if it came at a cost and one that only a much naiver General would agree to. I don’t know how true this story is or not but it has struck a chord with me in terms of how to think in Bull Markets and how to think in Bear Markets.

In Edwin Lefèvre’s evergreen book, Reminiscences of a Stock Operator there is a particular paragraph that is constantly quoted around as if it is the Holy Bible itself and yet quoting is one thing and executing is quite another. The paragraph in question,

What old Mr. Partridge said did not mean much to me until I began to think about my own numerous failures to make as much money as I ought to when I was so right on the general market. The more I studied the more I realized how wise that old chap was. He had evidently suffered from the same defect in his young days and knew his own human weaknesses. He would not lay himself open to a temptation that experience had taught him was hard to resist and had always proved expensive to him, as it was to me.

I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.

There is another famous quote by John Templeton 

“Bull markets are born on PESSIMISM, grow on SKEPTICISM, mature on OPTIMISM and die on EUPHORIA.”

But how does one identify a bull market and how would one know it has ended. Being wrong in identifying correctly the start of a bull market would mean a loss of opportunity while being unable to identify the end of a bull market would mean a substantial correction not only to one’s net worth but also the beliefs we hold to be true.

Timing is Impossible say the experts while themselves timing every other day in a variety of ways. Or maybe they believe that they have better skill sets than the ordinary guy on the street and hence feel that What’s good for the goose is not good for the gander.

If you take the best textbook in economics by Mankiw, he says intelligent people make decisions based on opportunity costs – in other words, it’s your alternatives that matter. That’s how we make all our decisions – Charlie Munger

Quote Source: The Joys of Compounding

The only reason to play the game of the stock market is simple – the alternative is worse off – either in terms of returns or in terms of liquidity or in terms of size of the market itself. So, once we have decided to play, the question is how to ensure that the odds favor us.

The markets these days are on a tear. On an average, we are seeing 50+ stocks hitting a new 52 week high every single day. But are markets up unreasonably? 

Let’s assume for a moment that we did not have the health crisis we have on our hands due to Covid. Would you have assumed that the markets were irrational in making a new all time high? My guess is that you wouldn’t have. 

But Corona and the impact it has had on the economy makes up question the new reality. When the financial crisis erupted in the US, it had an enormous impact on the general population of the United States. Out here in India, it barely logged other than those who were directly in the line of fire such as the Stock Markets.

Corona has been different – the impact was felt not just among the small population that invests in the market but the general population at large. The impact is very much visible – from the empty restaurants (though they are now getting back to normalcy) to businesses we touch base in the course of our daily life and have suffered.

The impact makes it tough for us to acknowledge why the markets are shooting up right now when news all around seems to be more bearish. In the United States, the markets are rocketing higher even as the number of Corona Cases per day has crossed the Lakh mark per day. 

In March, just a couple of days before we made the final low, I wrote this post

Mayhem in Markets. Will it End | Portfolio Yoga

Markets have  historically bottomed well before the trumpet of victory was sounded. This time it has not been different. Markets and Life itself has moved even though we are yet to fully conquer the disease. 

In the summer of 2003, after having suffered through a gruelling bear market, markets suddenly started to rise. In the space of less than a year, Nifty doubled and made its first all time high since the peak of 2000. While that victory was short-lived thanks to the fall of the NDA government, it was in hindsight the start of the biggest bull market India had seen. 

Markets have this ability to surprise us in both ways – on the upside when things seem to be wrong all around and on the downside when things are supposedly going all too well. 

One of the ways I have found helps in participating is having the tools that provide you with a perspective on what works and what doesn’t. Personally I favor tools that look at the breadth of the market and try to determine how they behaved in similar situations of the past. 

One such indicator I look out for is the % of stocks that are trading above their 200 day EMA. When they have crossed the 60% mark (after earlier having dropped below the 20% mark), Markets on an average have moved up 50%. This was triggered in August of this year and we are up 15% as of date, so who knows. 

One thing I believe in though is that markets are not in the Euphoric stage even though on the outside it appears so. For example at the beginning of 2004, 90% of the stocks that were trading were having positive momentum (in a way I define it) vs today’s number of 55%. 

One simple definition of the start of a bull market comes from Barry Ritholtz who holds that the Bull Market starts not at the bottom of the last Bear Market but at the breakout above the high of the previous bull market. In that sense, the journey has just started. Too early to fail?

Another would be the 200 day EMA on the Index heralding a bull market. Nifty crossed over that barrier in July and currently sitting 23% above it. 

The future is unknown though. This post may after all be the final nail in the coffin or maybe not. I for one am happy to have finally been able to participate in the bull market with as much exposure as I can afford. Like Mr. Partridge, I have come to accept that while there are a lot of reasons for markets not to move higher, there is nothing worse than staying out of a trend which could in hindsight be one of a longish phase.