Looks like a bull market; feels like a bear market; what is going on?

May 26, 2021

I have grown up with the idea that shares were either in a bull market, generally rising or in a bear market, generally falling. Since 2009 the pattern has changed somewhat with a long bull market, led by technology shares, interspersed with periods of profit-taking that have occasionally been so dramatic that they looked like what used to be called panics. These new style panics could be very severe but also have been short-lived, typically around three months from peak to trough.

Covid-19 and the associated lockdowns led to a change in the pattern. Lockdown forced activity on-line and had a devastating impact on all activities which involved people gathering in groups or even coming close to each other. A big chunk of the stock market went into meltdown with businesses fighting for survival and clinging on with government support.

Meanwhile technology shares were off to the races. They benefited from booming demand as digital transformation swept the planet. They also benefited from the build up of savings as people trapped at home spent less and saved more and looked for a home for their money that paid more than cash in the bank. Last but not least their shares flew higher as they became the only game in town.

After the party comes the hangover. Technology shares, we can now see, flew too high in this halcyon period and many are suffering as a result. I define a down trend as occurring when the monthly averages I use (five and nine months) are falling with the five below the nine. A number of exciting names are in downtrends by this metric.

There is as yet no sign of any noticeable deterioration in the fundamentals. I look, in all my publications, for stocks which are 3G (great chart, great growth, great story). At the moment the great chart bit is not always behaving but the great growth and the great story remain fully intact. Companies I like on fundamental grounds are mostly still growing strongly and addressing large markets pointing to sustainable growth well into the future.

The fundamentals appear to be so strong that even when waves of profit-taking are hitting the market many names are not in downtrends but are consolidating. This applies to some very important names. Apple is not only consolidating but the chart looks very like an upward sloping triangle. Any chartist will tell you that this is normally a bullish pattern waiting to be confirmed by an upside chart breakout.

Apple began consolidating in August 2020 and the shares have been trading broadly sideways for about nine months. It’s a grey area where to draw a line but I would feel excited on a close above $135, especially if the close had breakout characteristics – higher volume, a gap in trading or an exciting piece of ‘something new’ news.

Some sort of breakdown would be disappointing but unlikely to be disastrous. Apple is a business with outstanding fundamentals. I think it is reasonably priced on a PE in the middle to low 20s, especially given that the company’s gargantuan free cash flow enables it to buy back its own shares in industrial quantities. For Apple to really break down something visibly disastrous, a catastrophic black swan, would have to strike the global economy.

Bottom line, the odds strongly favour an upside breakout eventually. Other big names consolidating include Adobe, Amazon and Nvidia. Other giants like Alphabet and Microsoft are still firmly in uptrends and Facebook has broken out firmly higher and is worth recommending at $318, which is one reason why the indices, even heavily tech-weighed ones like the Nasdaq 100, are trading close to their all-time highs. This is why I say it looks like a bull market but for many holders of middle ranking technology shares that have been such favourites across my publications it may feel more like a bear market because they are the ones bearing the brunt of the profit-taking.

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