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Recognizing Secular Bull/Bear Phases at Trader’s Narrative

In a previous discussion about the battle royale between fundamentals and technicals, a reader challenged the idea that we are in a secular bear market by asking for a definition. That sounds like an interesting intellectual exercise so I’ll put some thoughts together and share them with you next week.

In the meantime, it is a nature of the financial markets to ebb and flow in cycles. For the purpose of orienting ourselves properly then it is important to be able to recognize whether the major trend is up or down. The most widely recognized cycle for equity markets is the 18 year secular bull and bear cycle.

This back and forth pattern of advancing and declining stock prices dovetails with the declining and advancing prices of raw materials. As resources become more expensive, they eat into the profits of companies and as they become cheap, they margins grow fatter.

Here is a 100 year chart of the Dow Jones Industrial, courtesy of Gluskin Sheff, followed by some of my thoughts:
secular bear bull phases long term chart Jun 2010

Here are some observations:

  • major trends are defined by lows and highs
  • the trend is rarely ‘clean’ but moves 2 steps forward, 1 step back
  • this dance is called a ‘bear market rally’
  • the phases are recognized and annotated in hindsight
  • definitively labeling a market requires that we wait and be late
  • 16, 17.6, or 18 years? depends on how you look at it
  • if the secular bear started in 2000 then it will end in 2016-2018
  • this is a map but remember, a map is not the territory
  • we are smack in the middle of the ‘lost decade’ highs and lows
  • 1920-1940’s was a wild ride still unparalleled as of yet
  • difficult to classify the 1920-1940 market because of volatility
  • secular bear markets grind down almost all previous gains down to nothing
  • for today’s market that would mean the Dow Jones Industrial at 5000
  • yet, the lows are still slightly higher as are the highs

Zooming back into the chart, here is a look at just the largest bear market rallies:

post massive bear market rallies Jun 2010
Source: Chart of the Day

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3 Responses to “Recognizing Secular Bull/Bear Phases”  

  1. 1 BO

    I agree your definition. But it is noteworth that emerging markets(especially China) are likely to experience a secular bull market. Japan market shows a secular bull market form 1970 to 1990.

  2. 2 Rod

    It is always good to have a macro bent. Intermarket relationships do matter.

    The following is a small list of markets displaying a “Death Cross”:

    - Shanghai Composite
    - Copper
    - WTI Crude
    - 10 Year T-Note Yield
    - AUD/JPY (carry trade vehicle)
    - AUD/USD (carry trade vehicle)

    It must be said: Death Cross dead ahead for the S&P 500 unless the market rallies in sustained fashion from here.

    Meaning? Be careful out there, especially if you are just looking at a single market’s oversold indicators.

  3. 3 Rod

    Wow. 10-year below 3.04%. My friends, this is serious breakdown territory!

    The bond market is calling BS on anyone bullish about the economy.

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