February 6th, 2013

The Secular Bear Market and the QE’s

imageBarry Ritholtz recently asked in his blog, “Is the Secular Bear Market Coming to an End?“. He goes on to say “Here we are, a few weeks away from the start of the 14th year of the secular Bear market that began March 2000. The question on more than a few peoples’ minds has been whether or not it is reaching its end.”  Ritholtz goes on to give his definition of the term “secular bear market” and offers prerequisites required before the bear market can end.  In short, he concludes

“Regardless of your answer to our broad question, there is one thing that I believe to be clear: We are much closer to the end of this secular cycle than to the beginning. Many optimists — most notably, famed technician Ralph Acampora — believe the secular bear market has ended. Even skeptics have to agree that we are more likely in the 7th or 8th inning than earlier stages of the game.”

and offers the following chart:

Secular Bull and Bear MktsSource: Haver, Factset, Robert Shiller, FMRCo. Monthly Data, since 1871.

[Some of Ritholtz’s comments and image match those of found in Fidelity Investments Viewpoints of a few days earlier.]

Helping to prevent losing objectivity to my fundamentally optimistic nature has been a long-running discussion about how the exit from the Secular Bear Market that has hampered the market’s advance for the past 14 years might ultimately look like.  The discussion began with a study of market behavior over the past 50-year that serve as the basis for the Market Momentum Meter, one of the principal topics of my book, “Run with the Herd“.

The data reveals that the market has fluctuated around a line that’s risen at a fairly consistent 7.5%/year rate since 1939.  The upper and lower boundaries of fluctuations around that line are +/- 44% on either side of that upwardly sloping mean distribution line.  The upper boundary was touched at the beginnings of the 1970 and 2000 decades, both of which were also the start of what turned out to be Secular Bear Markets.  The lows of both those Secular Bear Markets were at the lower boundary of the range.

S&P 500 1939-Present

Having touched the lower boundary in 2009, I wondered whether the exit from the 1970’s secular bear market might serve as an analog to the exit from today’s secular bear market.  “What the market trend be if it followed exactly the 1979-82 exit?”    I’ve written about the exit here several times over the years, the most recent being last year on June 4 in “Revisiting 1970’s Secular Bear Market Exit … Again” [that post includes links to previous references to the Secular Bear exit going back to October, 2008.

It turns out that the current Bear Market and the one in the 1970s is that inflation and economic stagnation (then known as “stagflation”) had one major difference.  Inflation had hit an annual rate of 13.5% when Jimmy Carter appointed Paul Volcker to head the Fed in August 1979.  He immediately began attacking inflation by raising interest rates to unprecedented levels of 20% by June 1981; inflation soon began easing and interest rates began to fall.

The current Bear Market was diametrically opposed, especially since the Financial Crisis and bursting of the housing bubble, with the fear of deflation with the crash in housing and real estate values.  To fight the “Great Recession” and ineffective or insufficient fiscal policies, Bernanke launched Quantitative Easing monetary policies which brought interest rates to low levels not seen since World War II.  The following chart shows the different impact of the two monetary policy courses:

1980's Analog and QE's

The 1970s Secular Bear Market exit analog may have been a good benchmark against which to measure the prospective current Bear Market exit.  At this late date, I would have to conclude that not only have low interest rates helped the economy avoid a depression, they may have also helped the stock market exit more quickly from the Secular Bear Market.  Rather than reversing and, thereby, extending the secular bear market’s life, so long as Bernanke keeps rates low, one can be confident that the market will soon exit the Secular Bear Market, cross into all-time new highs and, with luck, begin the first bull market advance since the 1990s.

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October 25th, 2012

Maria Misses the Big Picture

Maria Bartiromo lambasted Greg Smith’s controversial book and his criticism of the culture at Goldman Sachs.  But, if you read the transcript carefully, you see that it was actually an op-ed piece about her placing the blame of the low participation on the part of individual investors in the market these days squarely on Wall Street practices.

She may also have been trying to place blame for the drop in the viewership of CNBC also on the absence of individual investor participation and, by inference, at Wall Street’s shenanigans.  In a recent NY Daily News article quotes CNBC execs as saying that

“the cable business channel are “freaking out” because viewership levels are down essentially across-the-board, particularly with its marquee shows, “Squawk Box” and “Closing Bell”. Their biggest attractions have become their biggest losers.”……..


The network has already moved to revive “Closing Bell.” On Friday, CNBC announced it had poaching “Cavuto” exec producer Gary Schreier to take the helm of Bartiromo’s show.  According to the Nielsens, “Closing Bell” is also seeing its third straight quarter of decline.


From April 2011 to April 2012, the show is down 16 percent in total viewers and 11 percent in the 25-54 demographic.

“Maria gets good interviews, but she’s also not creating enough buzz,” says the insider.

It should be noted, that the Murdoch empire owns the NY Post, a Daily News competitor and also has the Fox Business News Network and delivers “Your World with Cavuto” on the Fox News Network.  But back to Maria’s rant.  In her op-ed piece, she claimed that

“there are issues in the [Wall Street] community.  Why else has the retail investor left the party?  trust has plummeted between the financial crisis, flash crashes, trading glitches and debacles like the facebook ipo, it has taken a toll on the retail investor.  bottom line, clients should be the priority, integrity should be the goal even at the expense of profitability, so books like these will not help.  it’s time for wall street to work overtime if and when that trusts returns, we all know that will help a lot more than just wall street.”

Where has Maria been for the past 10-12 years?  Has she had an opportunity to do more than merely repeat the day’s screaming headlines to actually see how truly abysmal the market’s performance has actually been during the secular bear market of the past twelve years?  True, there has been extreme, volatile long-term moves of 100% to the upside and 50% to the downside.  But in the end, the market is just about where it was in 2000.  The absence of individual investors probably has more to do with the Afghan/Iraq wars, the housing/financial crisis and failed Congressional/Executive leadership than it does Wall Street’s failures or excesses. (image from post several days ago, Important Stock Market Supports)

With the market failing to deliver any positive news, why should the small investor participate?  Why should they watch CNBC?  And, I might add rather selfishly, why should they read this or any other blog?  My hope is the the market does successfully break across the all-time highs not only because my investments will again be able to easily show some significant gains but also because my readership will jump and I’ll be able to sell more of my book.

Don’t loose hope; keep your chin up.  Contrary to the bearish views of many observers and Maria’s rather narrow view of Wall Street behavior being the culprit, the book’s final chapter is entitled “Where to from Here?” and it offers a fairly optimistic view of the market’s direction to 2020.

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February 17th, 2012

The Gestation and Rebirth of “Buy and Hold”

As January ended, I reiterated a hypothesis that the market was following the script written at the end of the 1970’s secular bear market by writing in That Old 1978-82 Analog Again,

“On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.  I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.”

Compare the two secular bear markets, note the similarity and draw your own conclusions (click on image to enlarge):

  • 1969-1980
  • 1999-2012

Combining the two charts in sequence produces the now familiar view:

For the past 5-10 years we’ve been listening to the mantra “Buy and Hold is Dead”.  Just do a search on the term and you see books, videos, TV clips, articles and blog posts …. I’ve probably even wrote it here several times over the past 6 years of this blog’s existence.  Not to be just a contrarian but because I believe it might be true, I now offer a heresy.  If we are witnessing the death of the current secular bear market might we not also be seeing the rebirth of buy and hold?

If the market over the next several quarter into early 2013 is laying the groundwork for a new bull market might it not be the right time to load up on stocks with great growth potential that you’ll want to hold for several years through several corrections?  It begins not with the search for specific names but with a reorientation of mindset to accept the possibility that the market can and will exit the secular bear market by crossing above the previous highs and finally move into uncharted waters.

Let me know if I’m being a cock-eyed optimist or that it might actually turn out to be a plausible scenario.

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February 14th, 2012

Is the Market Overvalued and Overbought?

I was struck by a post on Slope of Hope entitled “An Ongoing Balloon Ride” the major premise of which was that the the market has risen too far and diverged too far from its 400-dma such that there’s no questions “if this debt-filled balloon will disintegrate, but when“.  The writer’s premise is that the several times in the past when the Index has diverged as far as it has from its 400-dma have all been followed by a drop or correction.

I have my own database and decided to do my own research and gather my own facts to see whether I could replicate those results and come to the same conclusions.  My database goes back to 1963 and the moving average I rely on is the 300- rather than the 400-dma (but what difference does a hundred days make between friends).  The Slope writer visually picked the areas when the index diverged significantly from the moving average and eyeballed the subsequent change.  What I discovered was:

The S&P 500 Index is currently 6.38% above the 300-dma.  In the 12,089 trading days between March 12, 1963 and March 11, 2011, a spread between the index and the 300-dma of 5.00-7.99% occurred on one out of every 6 days, or 16.89% of the time.  One could almost say that this spread is “typical”, not large or overbought or stratospheric.  Actually,  it’s fairly typical.

One can look at both tails of the distribution as indications of how extreme the spread defining overbought or oversold situations, times when one needs to sell or has a true opportunity to buy.  In 2008 and 2009, at the depths of the Financial Crisis Crash, the market was over 35% below the 300-dma …. we should have all bought then but few had the nerve.  In August, 1987, the market was 24% above the 300-dma; a few months later, the market suffered it’s largest single daily decline in the October Crash …. we should have sold.

The market was more than 20% above the 300-dma also in 1983 as the market rocketed in celebration of its exit from the secular bear market of the 1970’s.  Rather than crashing, the market went into a horizontal consolidation lasting 15 months (just like the past 15 months?  I’ll leave that determination for you to make.)

So is the market now overbought?  Not if you use the 300-dma as a benchmark.  Did the Slope of Hope contributor select a seldom used 400-dma benchmark to prove his point?  It’s possible.  Where would the market have to be for it be overextended or overbought by these measures?  Somewhere around 1500-1550 …. interestingly, exactly the level of the market’s all-time high as measured by the S&P 500.

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January 30th, 2012

That Old 1978-82 Analog Again

A post on Ritholtz’s Big Picture blog reflected a conclusion I recently reluctantly needed to begin facing.  Regular readers know that for over two years I have been tracking the path of the S&P 500 Index in what I call “Reversion to the Mean” (last mentioned here on November 4).  Briefly, the hypothesis was that the S&P has been growing since 1938 at an average annual rate of 7.5% and that it’s volatility around that growth rate was contained in a band of 40% above and below the mean growth rate.  The chart depicting that trend, updated with today’s S&P close of 1313.01.

The market’s horizontal path since the end of the Tech Bubble in 2000 appeared to me to have an uncanny resemblance to the secular bear market of the 1970’s. Consequently, I used the end of that prior secular bear market as an analog for the malaise that we’ve been suffering through for the past 11, going on 12 years and wondered where the market might wind up if it exited this time exactly like it did in 1978-82? The result was the following chart:
In November’s blog I wrote:

“…the market has been tracking fairly closely to the exit process back in the ’70′s so far. If that track continues for the near-term, we shouldn’t expect the market to approach the all-time high of 1365 until 2015 and not successfully cross above it until 2017. Let your hearts not lose hope because if it continues following the track then it could reach 3000 by 2020.”

So here we are, two months later and the market is only around 4% away from 1365.  With corporate earnings reports better than anticipated, we’re now beginning to read stories about expectations for expanding multiples and higher markets.  In a Bloomberg article today:

“Multiples for the benchmark gauge rose as high as 13.82 this year. Should earnings match analyst forecasts and climb to $104.78 a share, the index would have to reach 1,718.39 to trade at the average ratio of 16.4, according to data compiled by Bloomberg. That’s more than 30 percent above its last close. “


The following chart in Big Picture was the coup de grâce:

This is exactly the analog I’d been following for close to two years.  On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.

I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.

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