Equity markets have been on a record run for the last month with the last two weeks moving through overbought indicators/levels like a bailout bill in Congress. If you were waiting for a pullback to board the train, like we have been, the locomotive has yet to slow down enough. we think back to early March when Barak Obama made what I can remember as the first market call a President ever made. His timing was impeccable; we wonder if he had some inside information?
One of the keys we have discovered in business/life that we believe makes me more effective than we was in my younger years is a clearer understanding of the playing field we are encountering. The classic line in a movie we can remember is “Why would you bring a knife to a gunfight?” is the epitome of understanding what you are dealing with. Now we are not thrilled to use a violent situation as an example, but obviously the knife wielder did not understand the playing field.
The last year and a half the market has communicated that the “Buy and Hold” mantra which the majority of advisors on Wall Street dispense has some serious flaws. The current message of the market we are hearing is that we have retreated far enough and a new phase is unfolding. Hopefully you are now aware of the term Secular Bear Market. This was an off-limits topic for many on Wall Street for the last couple of decades. But those who lived through the thirties and seventies and paid attention to the stock market are familiar with the 10-20 year periods of range bound performance of equities.
We have mentioned the significance rallies in bear markets can have, but if you are in a long term bear market they have been known to give the entire rally back. The table blow is from the book “Why Stocks Won’t Beat Money Markets over the Next Twenty Years” by Michael Alexander.
Markets Duration (yrs.) Annual Return Bull Markets Duration (yrs.) Annual Return
1802-1815 13 + 2.80% 1815-1835 20 + 9.60%
1835-1843 8 - 1.10% 1843-1853 10 + 12.50%
1853-1861 8 - 2.80% 1861-1881 20 + 11.50%
1881-1896 15 + 3.70% 1896-1906 10 + 11.50%
1906-1921 15 - 1.90% 1921-1929 8 + 24.80%
1929-1949 20 + 1.20% 1949-1966 17 + 14.10%
1966-1982 16 - 1.50% 1982-2000 18 + 14.80%
Overall 95 + 0.03% Overall 103 + 13.20%
Not exactly a best seller, but to his credit he published it in early 2000 and so far he has been right. He goes back two hundred years showing fourteen distinct periods, seven Secular Bear Markets and seven Secular Bull Markets. A couple of important things to note is that all the profits were made during the bull periods and both sides of the ledger had durations ranging from eight to twenty years.
The internal strength, breadth, and technical structure of the recent rally lead us to believe that this has the potential to be different from the other rallies we have had since the October 2007 high. We would describe these previous rallies as Bear Market rallies lasting several weeks and basically designed to relieve the oversold nature of the market. What we believe has begun to unfold here is a Cyclical Bull Market within the confines of a Secular Bear Market.
From the research we have done we see a rally in a bear market to be the likes of what we experienced from November 20th through the first week of April 14th, 2009 January. These are multi-week affairs with moves up from 20-30%, while a Cyclical Bull Market can last over a year and move 40-80+%. The last Secular Bear Market a major index experienced was the Japanese Nikkei starting in 1990. From a peak of 39,000 the 80’s world leader dropped to 14,300 in about two and a half years. Stuck in a trading range through most of the nineties, the Nikkei had two separate rallies lasting longer than a year and gaining over fifty percent.
As you can see below the latter part of the decade brought another leg down that took the index well below the previous lows. In fact as of last month the Nikkei was at the same level it was in 1983. Essentially no progress for 26 years!
Many investors we have recently spoken with have retreated to the sidelines with the bulk of their portfolio. This is a time we feel to take advantage of some of the clues history has provided and attempt to profit in what appears to be a multi-month Cyclical Bull Market. Remember one of the clear distinctions between a Secular Bull and a Cyclical Bull; a Secular Bull allows you to be passive while a Cyclical Bull requires you to be attentive and vigilant.
We think there is a distinct possibility that the Dow Jones Industrials could be trapped in a trading range between 5,000-10,000 for the next 5-10 years. Can’t imagine Buy and Hold working if that does unfold. It will be interesting to see how the financial advisors who employ that strategy adjust?
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