Markets due for a correction, analyst says

(June 29, 2005) Every four years the market bottoms out, creating a major buying opportunity. That opportunity is coming soon if you believe Ralph Acampora, director of technical analysis at Prudential Securities.

He says buy and hold doesn’t work in today’s markets, and investors trying to index will likely end up right back where they started. In addressing delegates gathered at the Investment Dealers Association conference in Banff, Alberta, Acampora said the pickup in market prices in the past two years is part of an aging cyclical bull run happening within a secular bear market.

That phrase is frequently bandied about by technical analysts and the portfolio managers who listen to them. Misunderstanding about the difference between the words “secular” and “cyclical” however can sometimes create misunderstandings about what the market is actually doing.

Secular refers to an event that happens once in a generation. On Wall Street, Acampora says secular refers to a period of about 20 years. Cyclical movements on the other hand are shorter term in nature — lasting anywhere between six months and two or three years. Right now the Dow Jones is moving sideways, much the same way it did between 1966 and 1982. Within that bearish trend there are shorter term cyclical movements.

Current consolidation deals like the TD bank deal with Ameritrade are simply a sign or symptom of the current bear market. The winners at the end of this secular trend, says Acampora, will be those left standing. To that end, he encouraged delegates to get degrees, credentials and education along the way. “I’m not afraid of change; I just want to be ahead of it. So should you,” he says. “We know things are changing. We need to smarten up. Whoever’s left standing at the end of the secular bear market wins.”

He also encouraged delegates to check their assumptions about what will perform well, and keep their eyes open for trading opportunities in the future. “Don’t fall in love with everything.” For example, Acampora is currently underweight in U.S. listed materials and commodities stocks. “I would be very, very careful,” he says. “There are periods when they’re in favour and out of favour. Keep that secular bear in mind.”

Although warning investors about commodities could be somewhat unpopular, especially in Alberta, the clamour for dividend paying stocks adds support his theory about the coming end of this latest cyclical bull run.

The current up turn in stock prices began when stocks like Nortel and Lucent and others that might be termed “junk” by blue chip standards, bounced and started moving higher. Inevitably, he says the run will end with investors moving into blue chip stocks. “This cyclical bull market started with stocks that wouldn’t normally start a cyclical bull. When it ends, it’ll end in the opposite way, it’ll end with quality.”

Right now, he says, the market is beginning to show cracks and not all sectors are participating. Shares like FedEx for example are losing despite the fact the company participates in the economy by moving almost anything companies can produce. Transportation shares are falling, due in part to high oil prices, but Acampora says rail stocks aren’t doing much better. Overall, he repeats, the bull market is getting old, and a buying opportunity is likely coming in the next year or so.

“It’s not dead and gone, but it’s not a baby bull either,” he says. We’re in the last stages of a cyclical bull market.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com