Day Trading & Forex Forum

Chart 4.

The late 1930’s signal proved to be the only one of the nine since 1800 to be a whipsaw. Given that markets spend more time rising than falling, the benchmark has been raised from 10% to 35%, so momentum sell signals are triggered when the oscillator peaks. These sell signals are flagged with the downward pointing arrows in Chart 4. In some instances the peaks are followed by multi-year trading ranges rather than actual declines, but nominal prices still had a hard time advancing after the signal had been given.

Chart 5. Secular accummulation points are indicated where the oscillator bottoms out from below the -10% level.

Now the Ratio has triggered its seventh sell signal. While it may not be an indication of a major bear market, the oscillator’s record certainly suggests that the range. Perhaps most importantly of all is what I call the “pendulum principle”, which is based on the observation that every sell signal since the early nineteenth century has been followed by an oversold reading before a new secular bull market could get underway. With the indicator still quite a ways above zero, the market clearly has plenty of downside potential before another oversold reading can be generated. In layman’s terms, the pendulum still has a long way to swing before investors return to the mood of total disgust with equities that precedes a secular bull market. And this is what brings us to the current picture. (Techniques for identifying reversals in the secular trend of bonds, commodities, and stocks, can be found in The Investor’s Guide to Active Asset Allocation.)

The State of the Current Bull 

How does the current bull market stack up against previous rallies in a secular bear trend?

There are two big differences between a primary bull market in a secular uptrend and a primary bull market that develops under the backdrop of a secular trading range, or bear market. The “secular uptrend” bull is typically far greater in magnitude and duration, while the “secular downtrend” bull is usually much more subdued. Taking the 1900/21 and 1966/82 periods, the average duration, based on month-end closes, was 27-months for an average gain of 51%. The longest bull market began in 1903 and lasted for 35-months. And the biggest rally, which began in 1907, was followed by a gain of 65%.

The most recent bear market low developed in October 2002, although there was a test in March of 2003, when many other world markets touched their final lows. If we use the October date with an April 2006 high, we come up with a record duration of 42-months for a gain of 61%. If we substitute March 2003 as the low, the duration and magnitude of the rally up to April 2006 was 37-months with a 56% gain, respectively. If the secular bear market or trading range scenario is valid, a cyclical bear market is clearly way overdue, whichever low is used.

Incidentally, the average bear market for both the early- and mid-century periods lasted about 18-months, and prices lost approximately 28% of their value in absolute terms. The average duration was actually a bit longer because the unusually long 59-month decline that took place between 1909 and 1914 was omitted from the calculation. Projecting this average 28% decline would place the S&P Composite at approximately 940 - just below the October 1998 bottom of 966 and almost right at the rally peak separating the late 2002 and early 2003 lows