“The most hated bull market” continues.

Yesterday the S&P500 closed above 1900 for the first time – a record.

As I like to point out, the pundits were wrong again.  Just days before the market hit a new high, they were scrolling off lists of why the market must go down.  The utilities are going up, interest rates are going down, and small caps are weak were discussed at length.

Cautious comments by prominent market investors and analysts were taken out of context or embellished to build dramatic headlines. I watched one such interview on CNBC.  The analyst made an observation that there is precedent for small-cap stocks declining 20% while the major indices remain relatively stable.

What was the next day’s headline?  “So and so sees 20% Crash”.  Why is it so inconceivable to so many that stocks can and have been going up?  While it may make everyone uneasy, a hated bull market is exactly what we like.  Bull markets need new buyers.  As long as there are bears to convert to bulls, the stock market can move higher.

So what are the worries running around in my head?

While I am mindful of the broad market dynamics, I remain an individual stock picker focusing on companies and their respective businesses.  I worry that it is increasingly hard to find stocks that are cheap on an absolute basis.  In 2009, there were so many companies that were selling at very low valuations.  That was then.

I am uncomfortable with a framework employed by many investors that declares a company cheap because it has a lower valuation relative to other companies.

I like to buy companies that are cheap period.

As a bull market progresses, perhaps the relative game becomes the only game in town but I am constantly checking with my internal value compass to make sure that, as stock prices move higher, I am not trying to see value where there is none.

As you can tell, I still believe the market is going to move higher from here.  Sure there will be corrections along the way but regardless of how it may feel, not every down day will be the beginning of a bear market.

However, I am very concerned that general investor anxiousness combined with copious amounts of indexing, computer programs, and algorithmic trading are a recipe for turning an ordinary market correction into a much deeper decline.  Computers can take down the cheap stocks as well as the expensive ones.

The traditional definition of a bear market is a decline of 20% from the high.  I’m afraid that the uncertain brew I just mentioned has changed that definition to something closer to 50%.

For now, I’m riding the higher highs and the higher lows of this bull market.  At some point, the tent will be full of bulls and the upward run will end, but right now the upward movement in the face of the sensationally bearish headlines is grinding down the bears.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.