Monday, December 10, 2012

Defining a secular bear market - by Dr. John Hussman

One way to think about the effect of a secular bear market is to compare the absolute amount of volatility experienced by the market to the total distance it travels. In the chart below, the blue line represents the sum of absolute weekly percentage changes in the S&P 500 over the preceding 4-year period, divided by the absolute overall change in the S&P 500 over that period. A spike in that line indicates that the market experienced a great deal of week-to-week volatility over a 4-year period, without much net movement overall (Geek's note – this calculation is related to the concept of fractal dimension - the spikes are singularities where the ratio is undefined because the 4-year change is close to zero).

An extended period of blue spikes is the hallmark of secular bear markets. These periods have reliably followed periods of elevated valuations as we have observed, with little respite, since the late 1990s. A great deal of distance traveled, with little to show for it overall. Present valuations provide little reason to believe that this period is behind us. Things will change, and this period of distortion will be behind us. The transition is likely to be unpleasant for the market, but again, I expect that we'll observe good opportunities to accept significant market exposure even in the coming market cycle.




by Dr. John Hussman
December 10, 2012 
Secular Bear Markets - Volatility Without Return

Monday, September 24, 2012

Bull & Bear Markets Since 1950

Since 1950, there have been seventeen (17) bull & bear market cycles (more or less, depending on how you count). Here is a semi-log scale chart of the S&P 500 Index since 1950, which pretty clearly shows the bull markets, the market peaks, and the subsequent bear markets:

This semi-log scale chart is the one that stock brokers and financial advisors typically use, because it goes up and to the right which supports the concept of stocks for the long run, the observation that we are always either in a bull market, or just about to enter one, and that, to avoid the negative effects of inflation, you must invest a certain portion of your portfolio in equities, in the stock market. 

The semi-log scale chart has the advantage that it shows the earlier bull & bear market cycles much more clearly than does the equivalent linear scale chart, shown below: 


Since the purpose of this post is to show the details of individual bull & bear market cycles, let me explain my methodology:

(1) Downloaded S&P 500 Index monthly close data from 1950 to 2012, from Yahoo! Finance (symbol: ^GSPC).

(2) Identified monthly, absolute peak value (1549.38), Oct., 2007.

(3) Identified 17 bull & bear market cycles - start month, peak month, end month.

(4) Normalized monthly data for each of the 17 bull & bear market cycles so they could be plotted on the same Y-axis chart.

(5) Graphed the data:


Here is the chart of the 17 cycles. We notice several things:

(1) Bull markets are typically twice as long as bear markets. However, bull markets do not last forever. They all end. The longest, at 61 months, was the 2002-2007 bull market portion of the 2002-2009 cycle.

(2) Bull markets grow more slowly, at about half the rate that bear markets decline.

(3) Every bull market eventually peaks and becomes a bear market. 

(4) Earlier bear markets only gave up (retrenched) a portion of their bull market growth, so the overall market trend was upward over time. In the past 15 years, however, that has not been true.

The current 2009-2012 bull market is shown on the chart as a solid black line. Since it has not yet peaked, I had to estimate its position. I made the assumption that it will peak in February, 2013, five months in the future. The farther we are from the actual peak, the more the solid black line will be shifted to the left. 

The most important take-away from this analysis is the understanding that bull markets do not last forever. Furthermore, if you enter the stock market in the late stage of a bull market, you will likely sustain market losses in the subsequent bear market, losses that may take years, or even decades, to erase in the subsequent bull market. 

This is why analysts are consistent in saying that your expected stock market return over the decade following an investment is highly dependent on when you make the investment. Invest early in a bull market and you can expect decent returns; invest in the late stages of a bull market and you are practically guaranteed sub-par returns.

Monday, September 3, 2012

Ten Inviolable Rules for Dealing with Wall Street

Ten inviolable rules for dealing with Wall Street investment banks:

1 Reward is always relative to risk
2 Information is always asymmetrical
3 Good advice is always priceless
4 Always ask what the seller's motivation is
5 Legal documents always protect the preparer
6 Fees and commissions always impact performance
7 Investment banks always maximize shareholder profits
8 Investment banks always protect their own reputation
9 Keep it simple, stupid (KISS)
10 There is no free lunch, no free money, no riskless trade