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As we looked at yesterday, the Coppock Curve is extended to levels approaching past highs. Even a slight decrease in equity indexes could turn the indicator lower, suggesting that the cyclical bull market’s best times are over.
It is useful to step back from the daily volatility of the market and gain an overarching perspective. We are currently smack dab in the middle of a secular bear market cycle which will probably end somewhere around 2017. Under a best case scenario, it will take at least until then for the ramifications of the current crisis to work themselves through. So it is foolhardy to expect to see a secular bull market before then in stock prices. In the mean time we can see powerful bull markets in other assets and even powerful short rallies in stock prices, as we’ve seen since March 2009.
One way to put the current market in perspective is to look at a similar bubble in equity prices and its aftermath, the Nikkei during the late 1990’s:
Source: McClellan Financial
For the past few years, the Japanese secular bear market has provided an uncanny blueprint for the S&P 500 index. While separated by geography, culture and time, the two markets bear a striking resemblance. Of course, the two don’t match each other step by step. For example, if we follow the Nikkei’s exact footsteps we should have seen the rally continue unabated until June 10th 2010.
The general pattern of important lows and important highs has matched up surprisingly well. In fact, if it continues to do so, then we are about to see a significant decline into the final months of this year.
Another way is to look at the current US stock market in comparison to the aftermath of the 1920’s bull market in the Dow Jones Industrial Average:
Source: History paints a bleak picture
If we take the actual top of stock prices as occurring in 1999 or 2000, then the subsequent recovery to those highs in 2007 was just a very large rally powered by an unprecedented liquidity injection. That would then make the current cyclical bull market a smaller counter rally similar to the Dow’s 1938 bull market. Here’s a zoomed in chart of the Dow Jones between 1937 and 1939 with the S&P 500 index:
As Lawrence G. McMillan writes in the recent article, history paints a bleak picture. In the short term I couldn’t help but react as I have in the past to the readings of capitulation (Calling All Contrarian Investors!). I’m still waiting to be proven wrong. Just today the energy sector got nuked as a result of an impending government investigation into BP’s Gulf oil spill. That helped erased all the gains from last Thursday and put the S&P 500 once again in an area of congestion (and support).
That’s all for the short term however. In the medium to long term, it is important to remember that the aftermath of secular bear markets is grueling, long and painful.
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