Here's A Chart That Looks Bullish To Both Chart Geeks And Fundamental Analysts

Technical chartRBC Capital MarketsDOW JONES INDUSTRIAL: Secular lows defined by the 10-year (40-quarter) rate-of-change falling below zero.

Here’s a chart that’s been popping up in Wall Street’s stock market research reports.

It’s the rolling 10-year returns of the stock market. The version comes from Robert Sluymer, a technical analyst for RBC Capital Markets.

It tells us that a trough in these returns coincides with the beginning of a a long-term (i.e. secular) bull market in stocks.

Bulls believe this chart means there is no stock market that’s doomed to burst any time soon.

And it’s not just the chart gurus writing about this.

Strategists who construct their investment forecasts based on fundamentals all think its bullish.

Here’s Charles Schwab’s Liz Ann Sonders offered an explanation in her recent commentary:

Shifting gears, let’s look at another sign that there could be a lot more room to run for the market. Deservedly, much attention was given to the “lost decade” that was evident at the lows in 2009. From that low looking back 10 years investors had lost money; a rare occurrence last seen coming out of the Great Depression in the 1930s.

But notice the long-term pattern of this chart. Investors don’t spend a lot of time hanging around the mean line, but instead the market tends to trend in one direction for multi decades (well-overshooting the mean) before heading back down to well-undershoot the mean. Being less than five years into the upcycle, history suggests we have more room to run.

So what’s the explanation for this?

Well, it may have a little to do with how trailing returns affect investor psychology.

“2014 may finally be the year individual investors, as a group, begin to buy stocks in contrast to the net selling they have done since the bull market began nearly five years ago,” said LPL Financial’s Jeff Kleintop. “The five-year trailing annualized return for stocks has been weak, especially compared to bonds, in recent years. However, as 2014 gets underway, the one-, three-, and five-year trailing annualized returns for the S&P 500 will all be in the double digits for the first time this business cycle”

Inflows from the retail investor would certainly be welcome, especially as the Federal Reserve begins to think about removing liquidity from the financial markets.

“Our analysis of history shows that it is the five-year return that individual investors tend to chase, based on net inflows to U.S. stock funds,” argued Kleintop. “As of March 6, 2014, five years from the bear market low in the S&P 500 — even assuming no additional growth in the stock market between now and then — the five-year annualized return may have exceeded bonds’ 5% return by 20%. This may prompt many investors to reconsider the role of stocks in their portfolios, especially as interest rates rise and bond performance lags.”

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