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