Four Steps To Spotting The Next Bull Market

Date 15/09/2008

Fleet Street Letter

Theo Casey

I run the risk of sounding like a broken record, but we have just seen another huge market failure take place.

Lehman Brothers filed for bankruptcy last night. I would say that it has shot another hole into market confidence but there probably isn’t much further that confidence could fall anyway.

What does this mean?

Sadly, it means the value of your investment portfolio will probably fall today.

What should you do?

Read on...

In the last 12 months, I have read, and admittedly contributed to, an unprecedented amount of negative market commentary.

The economy is facing its "toughest test for 60 years." Similarly, the stock market is facing the "worst bear market for 90 years."

Unfortunately, all this market navel gazing does is give context. It doesn’t present us with any solutions.

And as investors, rather than market commentators, we do not have the time to be reflective.

As investors we know better than anyone on the sidelines that times are hard. When the leading index is trading below 1998 levels, that much is pretty apparent.

What we want, and need to know is:

a) When sustainable market confidence will return, and...
b) What it will take to get there.

So, over the next four weeks, The Fleet Street Letter is presenting four indicators that might just give us the green light to know when confidence is coming back to the market.

The spectacle of the credit crunch must not distract us from planning ahead. If we can spot the sea change, we could win big...

A necessary solution

With this assembly of indicators, we’ll know when it is safe to get back into the water.

When this time comes, the cycle resets.

And when that happens we return to the luxury of investing in a bull market. Don’t get me wrong, there are good investments in any condition. But, naturally, caution dominates our current agenda.

Our four indicators are designed to help us gain a potentially lucrative first mover advantage, when the pendulum swings from caution to exploiting the coming bull market.

We have seen so many false dawns in the market recently.

The number of times that the FTSE has rallied, only to fall back down again to lower levels, is frustrating.

The stock market and the real economy have become so interwoven that big macro factors need to be taken into account. The Economist spells it out neatly:

"Share prices are suffering because of the outlook for four forces that impel stock markets: economic growth, profits growth, interest rates and inflation.

"At the moment, the first two seem to be slowing while the last two are rising. That is the worst possible combination."

So, just what are these indicators?

How to go bottom fishing

Now, each of the following indicators could independently spark a little cheer in the market.

What we are looking for is the "perfect storm", the combination of factors that will slowly bring back not temporary, but long-term confidence to the market.

To coin a phrase, it would create, "a ‘tipping-point on the route back from crisis to stability."

Naturally, the market is not so linear and simplistic that by ticking four boxes everything will magically turn around.

But based on the study of investment houses, economic think tanks, our own beliefs and the demonstrated sentiment of the people, we believe that we have identified four important tests to tell us whether a turnaround is, or is not, imminent.

Over the next month, we will be laying out our stall on what we think needs to happen to bring back the bull.

It won’t happen in the short term — we may be well into 2009 before we see a concentrated rally.

But, these indicators could give us an advantage when that change does happen. It will help us stay one step ahead of the crowd and give us crucial clarity while all else are losing their heads.

We will be kicking off next week with a look at valuation, one of the key tenets of market attractiveness.

Looking at the value of stocks independently, through ratio tools like the P/E ratio, has been troubled. It has (erroneously) made banks and building societies look the most favourable investments.

Instead, we will be look at stock valuation as a whole, relative to bond valuation. Long time Fleet Street Letter readers may recognise this model. We will revisit it to give us an idea of when true value has returned.

Stay tuned for the first piece next week on valuation, how to identify it and what might need to happen before market appetite for stocks returns.

Best wishes,

Theo Casey
Investment Director
The Fleet Street Letter

P.S. If you enjoyed this article then we encourage you to sign up for The Fleet Street Letter. Get contrarian, cutting-edge analysis for sensible, long-term investments that secure you high growth and healthy dividends.

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