From Investment Postcards from Cape Town:
Ever since Richard Russell (Dow Theory Letters) called a “Dow Theory bull signal” last Thursday, the debate has been rekindled as to whether the US stock markets are experiencing a primary (secular) bull market or a rally within a primary bear market, i.e. a secondary or so-called cyclical bull phase.
As mentioned previously, Russell views the March 9 low as a secondary low, saying: “We are now in a cyclical bull market as opposed to a secular or primary bull market. In effect, we’re in an extended bear market rally. The true bear market bottom lies somewhere ahead.”
...Amid the uncertainty, the highly rated Ned Davis (Ned Davis Research) has just completed a research project in which he identified seven dimensions one could use to compare the March 9 low with secular lows of the past. His findings, as reported by Mark Hulbert on MarketWatch (hat tip: The Big Picture), were as follows.
(1) “Monetarily, money should be cheap and amply available”: Neutral. You might think that this factor should be rated as “bullish”, given how accommodative the Federal Reserve is currently. But Davis notes that banks are also significantly tightening their lending standards. Given the heavy debt load of both consumers and corporations suffer (see next criterion), banks are finding it “increasingly hard to find ‘credit-worthy’ borrowers”.
(2) “Economically, the debt structure should be deflated”. Bearish. This is the most negative of any of Davis’ seven dimensions, since the debt structure is by no means deflated. On the contrary, Davis calculates that the total credit-market debt load right now is nearly four times the size of gross domestic product, and that it takes more than $6 of new debt for our country to produce just $1 of GDP growth. That’s almost double the amount of debt required in the 1990s....MORE