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Is The Secular Bear Market Behind Us?

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    December 9, 2014

    We are still in a bull market, as indicated by our Bull Market/Bear Market Indicator.


    Our intermediate-term indicators remain on a buy signal, and the market is in its favorable season of Oct – May, and the blue chips of the Dow and S&P 500 are making new highs.

    Short-term, the market is very overbought above 50-day moving averages and probably due for a short-term pullback to alleviate the overbought condition.


    But how about the very long-term?

    Did the ‘secular’ bear market end with the beginning of the current cyclical bull market in 2009? Are we already in the next ‘secular’ bull market where buy and hold is a credible approach?

    Secular bear markets last an average of 17 years. In warning of a secular bear market being imminent in 1999, Warren Buffett spoke of “the next 17 years”.

    Dr. Med Jones, economist at the International Institute of Management (IIM), was not talking about secular bear markets, but had this to say in his 2006 academic study ‘U.S. Economic Risks 2007-2017’:

    “The economy behaves in cycles; for every up cycle there is a down cycle. It is only a question of how long and how steep the curve is. The next decade is probably the most critical for U.S. socioeconomic prosperity.”

    The title of his study, ‘U.S. Economic Risks 2007-2017’, was yet another reference to 2017 before risk would be diminished.

    The secular bear market of 1965-1981 was typical of the average 17-year secular bear.  Every time a cyclical bull market carried the market up to the previous high or above it, encouraging investors to believe all was well again, another cyclical bear would hit and take the gains back.

    It took 17 years of periodic cyclical bear markets to correct all the problems of the late 1960’s and 1970’s and see the economic and debt conditions back to normal to support the next secular bull market of 1982-2000.


    The secular bear market that began in 2000 has had two cyclical bull markets so far, after two cyclical bear markets took care of some of the excesses and problems.


    In its current bull market it has broken out to higher highs. Does that indicate that this secular bear market ended in 2009, only 9 years after it began in 2000?

    To believe that, we would probably have to think that the two recessions and cyclical bear markets so far took care of all the excesses, that there are no serious economic problems left.

    Yet we know, to name just a few, that in its rescue efforts the Fed created an unprecedented debt bubble, that interest rates at a record low near zero are not close to normal, that thanks to its massive QE programs, the Fed itself has more than 5 times the normal amount of assets and liabilities on its balance sheet, now at $4.4 trillion, than it had prior to the 2008 crisis.

    Then we should look at the market’s long-term overbought/oversold level in comparison to its long-term trend.

    In my 1999 book, Riding the Bear – How to Prosper in the Coming Bear Market,  I included a chart showing the market’s long-term regression trendline, and how far the market was above it, as one of the indications of how overbought it was (more so than in 1929), and one of the reasons I expected the bear market that was right around the corner “will be the worst since the 1929 crash”. And so it was.

    Below is an update of that long-term trendline, as is periodically compiled now by J Lyons Fund Management. 

    It also shows how far above and below its trendline going back to 1870 the market becomes at secular bear market tops and bottoms, and how the extremes in both directions have been followed by equal and opposite reactions to the opposite extreme.

    As is typical in ongoing secular bear markets, the two ‘cyclical’ bear markets since 2000 did not complete an opposite extreme before the two ‘cyclical’ bull markets cycled in. Combined with the serious excesses or bubbles that remain in place, this chart also implies that there will be another downturn, that Warren Buffett’s reference to 17 years is likely to be correct.

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    Here is another interesting tidbit.

    The Four-Year Presidential Cycle has a remarkably consistent long-term pattern. Almost all serious corrections and bear markets take place in the first two years of a president’s first term.

    However, that pattern is not consistent in a president’s second term. As I have noted before, a president in his second-term cannot be re-elected. So there does not seem to be the same pattern of getting recessions and bear markets over with in the first two years, and then providing whatever it takes in the 3rd and 4th year to make sure the economy and market are strong when re-election time rolls around again. The tendency seems to be to try to keep the economy and market growing all the way through the second term. It could be seen in the second terms of Reagan, Clinton, Bush Jr., and Obama. No recessions or bear markets in the first two years of their second-terms.

    But guess what, the next president will be in his or her first term. And that term begins in 2017. There’s that 17-year thing popping up again.

    Here’s another little tidbit. The 3rd and 4th years of a re-elected president’s second term do not have the same consistent pattern of being positive as do the last two years of a president’s first term. For instance, the 1987 crash took place in the 3rd year of Reagan’s second term. The 2000-2002 bear market began in the 4th year of Clinton’s 2nd term, and the 2007-2009 bear market began in the 3rd year of Bush Jr’s 2nd term.

    So in answer to the many questions I get about whether we are now in the next long-term secular bull market since the market has reached higher highs than in 2000 and 2007, it is my opinion that we are not, that the secular bear remains in place. I believe we are still in a period when buy and hold investing will be a losing proposition, and paying attention to intermediate-term moves and signals will be important.

    To read my weekend newspaper column click here:    Are We in Another 1990s Style Super Bull Market-

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    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

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