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Dow Jones Long Term Chart: Another Decade For Bear Market at Trader’s Narrative

The “naught” decade is officially over for the equity markets in the US. With it the stock market has put in only the second negative return for the Dow and the worst performance since the 1930’s. Something else stands out when you compare the performance of the Dow in decade increments: bear and bull markets cluster in twos:

decade returns showing 18 year cycle chart of the day
Source: Chart of the Day

This is another way to show this long term chart chart of the Dow Jones Index spanning more than 100 years from 1900 to 2009:

Dow Jones long term chart 1900 to 2009

This cycle of flat, trending, then again flat trading is something we’ve discussed before: 18 year stock market cycle. How ever you want to define it, whether the 17.6 or 18 or 2 decades cycle, the stock market has demonstrated rather predictable very long term patterns. That’s the good news.

The bad news is that we are in one of the wrenching long term bear markets and it could potentially last anywhere from 7 to 10 years more. If we take a bird’s eye view of these periods, they seem to be flat or range bound but zooming in shows a surprising amount of volatility. That’s why these seemingly flat trading periods grind down both bears and bulls to a pulp.

And that’s something that most forget. Bear markets don’t really make anyone a lot of money but erode prices to bring them in line with real value. To show you what I mean, let’s zoom into the two decades spanning 1920 to 1940 since they seem to be atypical (the 1920’s provided rich returns):

Dow Jones Industrial 1920-1940

While the index finished slightly ahead, the white knuckle volatility would mean in practical terms that almost everyone, unless they were extremely astute and lucky, would have lost massive amounts of money. As we’ve seen in this bear market, even the most hardened long term investor reaches a point where they just can not take the pain any longer. Human nature makes sure that most are not holding stocks right at or close to, the cycle low. Most recently we saw this as sentiment at the March lows was tremendously negative and everyone was fleeing to the safety of money market funds, liquidating anything risky.

So the wrong way to approach such a market is as a buy and hold investor. The right way is to be nimble and trade, timing the highs and lows as best as you can. Forget all the hogwash about the Efficient Market Hypothesis (EMH) which tells you that you can’t do that. There will be a time again to buy and forget. Now is definitely not that time.

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