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The Aftermath Of Secular Bear Markets at Trader’s Narrative

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There are a few frameworks we can use to build a model of the stock market. We’ve looked at the Weinstein stage analysis of the market and compared the previous bear market to this one. A recent Morgan Stanley report authored by Teun Draaisma, Ronan Carr, Graham Secker, Edmund Ng, Matthew Garman provides a more nuanced model.

They looked at 19 historical secular bear markets. Most of them were in equity markets around the world but they also considered one bear market in gold. Then they looked at what happens in the aftermath of each secular bear market. The report identifies 4 separate stages:

  1. a decline which on average slices market valuation by half in a little more than 2 years
  2. a rebound or counter-trend rally - taking prices 70% higher in 17 months
  3. a shallow correction which lasts almost as long as the rebound rally
  4. finally a trading range which lasts almost 6 years

Click to see full size in a new tab:

aftermath of secular bear markets morgan stanley research

Applying this script, the current bear market showed a 56% decline from its peak in October 2007. That’s perfectly within the historical parameters.

In the next stage, the S&P 500 climbed +53% from the March 2009 lows. According to the historical pattern of secular bear markets, we would have expect the S&P 500 to climb 70% from its low to 1150. But if it had followed this pattern, then it would arrive there by July 2010. However, the S&P 500 has managed to climb two thirds of its allotted 70% counter rally in only 5 months. So this rally is anomalous because its slope is much, much steeper than the average historical one.

The third stage is understandable as such a large move usually gives back a portion due to profit taking. But the next and last stage is the most interesting.

This is where the market has to finally digest the consequences of what initiated the bear market in the first place. A trading range or base building - according to Weinstein’s model - is necessary because it sets the stage for the next bull market.

Broad multi-year trading ranges followed the initial rebound in 10 of 19 bear markets. In most cases, structural problems in the real economy acted as a headwind to a new bull market…

During this moribund time in the market, structural pains such as inflation, deflation, inordinate debt levels, unemployment, etc. work themselves through the economy.

But for now, the consequence of this research is that the counter trend rally which we seem to be in right now can go on for much longer than most anticipate. Even if we do manage to climb the remaining 20% to 1150 on the S&P 500, the market can take its time until the summer of next year. The report concludes:

If the aftermath of these 19 secular bear markets is anything to go by, the current rally could go on a bit longer; is likely to stall a few months before the first Fed rate hike, which we expect in Q3 of 2010 … and is likely to be followed by some sort of trading range for years to come because of the structural problems of financial sector and household deleveraging as well as the poor state of government finances.

But as the study itself proves, while the past may rhyme - it hardly ever repeats.

Examples of the Four Stages of Secular Bear Markets
The following charts are 4 examples of individual markets which demonstrate the stages mentioned above. Notice that while the trading range may sound boring, on average they have a +50% width, making them extremely tradeable and lucrative. For example, the first instance, the 1930’s experience had a trading range of +/- 147%:

aftermath of secular bear markets S&P500 1930s

aftermath of secular bear markets S&P500 1970s

aftermath of secular bear markets Nikkei 1990s

aftermath of secular bear markets Gold 1980s

Here is the detailed spreadsheet showing the individual bear markets.
Click to see full size:
aftermath of secular bear markets detailed spreadsheet

Then & Now
Here’s a chart of the recent Nasdaq bear market compared to the Dow Jones 1929 bear market and their aftermath. So far the charts are eerily similar. Click to see full size chart:
comparing 2000 top in Nasdaq to 1929 top in Dow

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3 Responses to “The Aftermath Of Secular Bear Markets”  

  1. 1 Joe

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    The initial thrust down on average lasted 29 months. The bear market bottom in March was 17 months in SPX and 13 months in NDX, assuming November 2008 as the low point for the NDX. In essence, both these observations are well below the average duration of the first down thrust. We have had 5-6 month bear market rallies in between these huge first down thrusts, 1930, 2001/2 and even during the march-july 2008 time frame. So while I agree theres no refuting to the fact that we have declined 56% from highs, I dont like the fact that there have been only 2 observations where similar magnitude of decline happened in shorter timeframe and both was in a developing market (Hong Kong). We can deline for the next 12 months to a new low and yet, it will fit in perfectly within those historical bear market decline scenarios.

  2. 2 Babak

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    Joe, while the duration was shorter, the magnitude was on par (50% hair cut). But again, laying this template over today’s market doesn’t mean it will line up perfectly. Either the duration or magnitude will be off.

  3. 3 Paul

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    Weinstein stage analysis - “It isn’t too difficult to imagine the same sort of conclusion. One where the market falls once more but not beyond the swing lows it has already marked.” Will the market retest March low/swing low? Thanks in advance as it looks we are in a bull market.

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