There is much talk about whether or not this past 30% rally is indeed indicative of a newly birthed secular bull market or a relief rally, otherwise known as a cyclical bull market, from the extreme lows established March 9th of this year. To gauge what may lie ahead, market analysts correctly look to the past for guidance.
In my opinion we have entered what is known as a Secular Bear Market, triggered by the historic housing and credit crisis which began late 2007. The 2007 date is point which could be argued as the causes of this crisis date to a much earlier date, but for purposes of market analysis, I believe October of 2007 will stand as the date of the beginning of the new secular bear market trend. What is a secular bear market? It is marked by longer and more meaningful periods of deterioration interspersed by brief and sometimes furious cyclical bull rallies. Generally in a secular bear market, the bull rallies fail to meaningfully cover the long term investments losses of the more prevalent bearish trend. Secular market trends are longer than cyclical trends and can be anywhere from 5 to 25 years. We have had several bearish secular trends since 1900 with the most notable for equity investors being the period of 1966 to 1982. Another example of a secular trend is the period of 1980 to 1999 known as the “The Commodities Depression”, which was marked by extreme drop in the price of precious metals such as gold and platinum as well as many other commodities. The expiring secular bull was ushered in mid 1983 and lasted until 2007. The primary bullish trend was infused with cyclical bears such as the crash of 1987, the dotcom bust of 2000.
I believe it is important to recognize market trends for what they are and not necessarily what we wish they were. Investors can make money in all markets if they are able to invest with a critical eye towards reality. Those who believe we are climbing out of this turmoil into another long term economic expansion are sorely mistaken. Because most retail investment products such as mutual funds are “long only” instruments, the overwhelming majority of money managers will try and sell this recovery as the beginning of another expansion cycle. In my opinion it is not a great time to invest in equities for the “long term” as many pundits are touting today. The reality of the economic crisis we face and the resulting side affects of the remedies we have adopted to combat the downturn (TARP, TALF, etc etc) will have to be dealt with prior to another major expansion. The fact that we are deleveraging at historic rates means that growth will be anemic in for many years to come. More than ever, short term trading strategies such as the strategies we employ at Trading Options for Income and Trading Puts and Calls, will be key to navigating this more difficult investment landscape.
On a positive note, lest I be categorized as a “doom and gloomer”, I believe this secular bear market will be on the short side in terms of duration. In my opinion, we may be able to reverse course in 5 to 8 years and begin another major, long term period of economic expansion. My reason for believing in the relatively short duration of this secular bear market is that we are finally having to correct some issues that are crucial for long term sustained expansion. Issues such as alternative energy and dependency on foreign oil, health care, education and social security to mention a few, will more than likely be addressed by this current administration. The short term consequences of these actions will not be easy for markets to swallow. In the next several years Americans will more than likely pay substantially higher taxes, deal with high inflation and at the same time have less access to credit, all of which will dampen economic expansion.
Secular Bears and Cyclical Bulls….
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There is much talk about whether or not this past 30% rally is indeed indicative of a newly birthed secular bull market or a relief rally, otherwise known as a cyclical bull market, from the extreme lows established March 9th of this year. To gauge what may lie ahead, market analysts correctly look to the past for guidance.
In my opinion we have entered what is known as a Secular Bear Market, triggered by the historic housing and credit crisis which began late 2007. The 2007 date is point which could be argued as the causes of this crisis date to a much earlier date, but for purposes of market analysis, I believe October of 2007 will stand as the date of the beginning of the new secular bear market trend. What is a secular bear market? It is marked by longer and more meaningful periods of deterioration interspersed by brief and sometimes furious cyclical bull rallies. Generally in a secular bear market, the bull rallies fail to meaningfully cover the long term investments losses of the more prevalent bearish trend. Secular market trends are longer than cyclical trends and can be anywhere from 5 to 25 years. We have had several bearish secular trends since 1900 with the most notable for equity investors being the period of 1966 to 1982. Another example of a secular trend is the period of 1980 to 1999 known as the “The Commodities Depression”, which was marked by extreme drop in the price of precious metals such as gold and platinum as well as many other commodities. The expiring secular bull was ushered in mid 1983 and lasted until 2007. The primary bullish trend was infused with cyclical bears such as the crash of 1987, the dotcom bust of 2000.
I believe it is important to recognize market trends for what they are and not necessarily what we wish they were. Investors can make money in all markets if they are able to invest with a critical eye towards reality. Those who believe we are climbing out of this turmoil into another long term economic expansion are sorely mistaken. Because most retail investment products such as mutual funds are “long only” instruments, the overwhelming majority of money managers will try and sell this recovery as the beginning of another expansion cycle. In my opinion it is not a great time to invest in equities for the “long term” as many pundits are touting today. The reality of the economic crisis we face and the resulting side affects of the remedies we have adopted to combat the downturn (TARP, TALF, etc etc) will have to be dealt with prior to another major expansion. The fact that we are deleveraging at historic rates means that growth will be anemic in for many years to come. More than ever, short term trading strategies such as the strategies we employ at Trading Options for Income and Trading Puts and Calls, will be key to navigating this more difficult investment landscape.
On a positive note, lest I be categorized as a “doom and gloomer”, I believe this secular bear market will be on the short side in terms of duration. In my opinion, we may be able to reverse course in 5 to 8 years and begin another major, long term period of economic expansion. My reason for believing in the relatively short duration of this secular bear market is that we are finally having to correct some issues that are crucial for long term sustained expansion. Issues such as alternative energy and dependency on foreign oil, health care, education and social security to mention a few, will more than likely be addressed by this current administration. The short term consequences of these actions will not be easy for markets to swallow. In the next several years Americans will more than likely pay substantially higher taxes, deal with high inflation and at the same time have less access to credit, all of which will dampen economic expansion.