The ebb and flow of stock markets present opportunities to profit if an investor understands these cycles. Since 1900 we have had 27 bull markets with corresponding bear markets to make things interesting. Presently, we are experiencing the 6th longest and the 5th weakest stock market rally as measured by the Dow.
While this is interesting, it would be more helpful if we could better understand these cycles in the market. Well, the stock market does tend to move in cycles, short term (also called cyclical), and long term (also called secular). Secular markets typically can last between 10 to 20 years, while cyclical markets usually last between 2 - 3 years on average. Think of a secular market as the primary long term trend, while a cyclical market is simply a shorter term cycle within the primary long term secular market.
As investors and traders, we need to understand where we are within these market cycles, so we can be on the right side of the trend to enhance our success. For example, the market was in a secular bull market from 1982 - 2000, experiencing a strong primary uptrend where the Dow Jones Industrial Average increased over 10 fold from about a low of 800 to over 10,000. Of course, there were short term bear markets such as in 1987, however, the easy money was made on the long side as the primary trend was up.
However, here's where the danger lies: The majority of investors today have only experienced a secular bull market, such as the one from 1982 - 2000. Most of us have not experienced a long term secular bear market where the primary trend is mostly sideways to slightly down. The last secular bear market lasted 16 years from 1966 to 1982. Just to give you some perspective, the Dow Jones hit a high near 1000 in 1966, and hit a low in the 800s during 1982. In other words, the Dow essentially was flat for 16 years. During this time, the 'easy money' was not made on the long or short side, but by being being a good stock picker identifying undervalued opportunities, special situation stocks, and sectors that are temporarily strong. Understanding whether we are in a cyclical bull or bear market greatly enhances our chances for success.
The problem is that the secular bull market that began in 1982 ended in 2000. Therefore, while the stock brokers advice to hold for the long term was good advice for a secular bull market, it is totally the wrong strategy for a new secular bear market. The market entered into a new secular bear market in 2000, and as history shows, this new secular bear market will probably last at least until 2010 or longer. The market rally from early 2003 until now is simply a cyclical bull market within the new long term secular bear market. Holding for the long term will not work in this new secular bear market.
Let's look at each secular bull and bear market of the Dow over the last 100 years. As you can see, except for the secular bull market of 1921 - 1929, secular market cycles last on average 16 to 20 years.
- Secular Bull Market, 1982 - 2000, (18 years)
- Secular Bear Market, 1966 - 1982, (16 years)
- Secular Bull Market, 1949 - 1966, (17 years)
- Secular Bear Market, 1929 - 1949, (20 years)
- Secular Bull Market, 1921 - 1929, (8 years)
- Secular Bear Market, 1905 - 1921, (16 years)
Secular Bull Market, 1982 - 2000 (18 years)
Let's work backwards, beginning with the last secular bull market, which lasted from 1982 - 2000. The Dow increased over 10 fold from a low of about 800 to a high in the 11,000s. The strong primary trend was up and the best way to make money was to be long in your positions. Only the nimble were able to take advantage of the few cyclical bear markets that occurred in 1987, 1991, and 1998. These pull backs were also opportunities to establish new long positions.
Secular Bear Market, 1966 - 1982 (16 years)
Prior to the last secular bull market, the market was in a long term secular bear market which lasted from 1966 to 1982. During this time, the market essentially went sideways for 16 years. For example, the Dow hit a high of about 1000 in 1966, and low in the 800s in 1982. If you would have followed your brokers advice to 'hold for the long term' you would have been greatly disappointed. Sixteen years is a long time to receive next to nothing in return on your money.
The chart of the Dow below from 1966 to 1982 is a classic example of what a secular bear market looks like. There were strong cynical bull and bear markets during this time that caused the market to essentially remain flat for 16 years. However, there were shorter term cyclical bull and bear markets that could be traded.
If you could use a time machine and jump forward 10 years from now, I think this how a chart of the Dow or NASDAQ might look. Both traders and investors will need to do their homework, seeking sectors and stocks that present great value opportunities.
Secular Bull Market, 1949 - 1966 (17 years)
The Dow was in a secular bull market from 1949 - 1966. Here the primary trend was up, which is typical for secular bull markets. The easy money was made by primarily remaining long throughout the cycle.
Secular Bear Market, 1929 - 1949 (20 years)
From 1929 until 1949, the Dow was in the famous secular bear market which also defined the Great Depression. After the nightmare crash from 1929 to 1932, the Dow essentially went sideways to slightly up for the next 17 years, but did not reach its old highs near 375 until the early 1950s. However, there were cyclical bull and bear markets during this long term secular bear market.
The Dow experienced the mother of all crashed from 1929 until 1932. Then from 1932 until 1937, the Dow nearly quadrupled from a low of about 50 to 200. Then from 1937 to 1942 the DOW lost about half of its value from near 200 to about 100 (cyclical bear). Then from 1942 to 1949 the DOW recovered (cyclical bull).
Secular Bull Market, 1921 - 1929 (8 years)
From 1921 until 1929, the Dow was in a strong secular bull market. Actually, from a chart perspective this period was very similar to the more recent 1982 to 2000 secular bull market. The primary trend was up, and the easy money was made by buying and holding for the long term.
Secular Bull Market, 1905 - 1921 (16 years)
The Dow was in a secular bear market from 1905 until 1921. This secular bear market was typical of most secular bear markets, such as the one from 1966 - 1982, composed of mostly vicious cyclical bull and bear markets that result in a mostly sideways long term movement.
Hopefully, you realize it is very important to know the market's primary secular and cyclical trend. During secular bull markets, the easy money is make by staying long. However, during secular bear markets, staying long produces poor results at best and you could lose a lot of money. Stock picking and following the hot sectors is important for success.
Conclusion
The current market entered a long term secular bear market in 2000, and as history shows us, this will last at least until 2010, probably longer. As discussed above, during secular bear markets, the market trades in vicious cyclical bull and bear markets. Therefore, you have to be careful in the stocks you buy and be ready to sell them quickly should the market turn against you. Pull backs or cyclical bear markets will present opportunities to take new positions once they have run their course. It is also important to find value situations and play the hot sectors. You need to be defensive in our positions and for those who are willing to take the risk, you may want to take some short positions.
Trading and investing is much easier in secular bull markets, and much more difficult during secular bear markets. Since we are in a secular bear market for the next 5 to 10 years, it is going to be much more difficult to be successful in your trading and investing.
Currently, the cyclical bull market that begin in early 2003 is close to being over and a new cyclical bear market will begun that will last another 2 to 3 years. This means that the best plays will be on the bearish side for the next couple years, that is, until the next cyclical bull begins.
Hans Wagner runs a web site focused on stock market strategies and model portfolios for the investor and trader at: http://www.tradingonlinemarkets.com
0 comments:
Post a Comment