-- Published: Thursday, 6 February 2014 | Print | Disqus
By: David Chapman
TECHNICAL SCOOP
CHART OF THE WEEK
Charts and commentary by David Chapman
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Charts created using Omega TradeStation 2000i. Chart data supplied by Dial Data
Bear markets inevitably follow bull markets. The question that everyone usually has is how long can a bull market last and how would one know when the bear market is getting underway. The current stock market bull market is entering its fifth year if one counts it as beginning in March 2009. The current bull market followed one of the worst bear markets in history when the Dow Jones Industrials (DJI) lost 53.8%. It was an historic bear market, becoming the second worst bear market in history surpassed only by the 1929-1932 bear that saw the DJI lose 86%. Grant you the 2000-2002 NASDAQ was trimmed by 76.5% instantly putting it in the same league as the 1929-1932 DJI bear.
But even the 2009-2014 (to date) bull market was interrupted in 2011 when the DJI fell 16.8%. The 2011 mini-bear was short, only 157 days, and 2011 ended up with the DJI gaining 5.5%. In terms of gains for successive years, the DJI has been up five years in a row. That is quite a run but it is far from the best string of successive up years. That belongs to 1991-1999 when the DJI was up for nine successive years.
So will the bull market continue or is the down January for the markets signalling that the current bull is running into trouble? Since 1900, there have been 36 bull markets and 35 bear markets. In terms of time, the bull market that got underway in October 1990 was the longest lasting 2,836 days before it peaked in July 1998. There were a couple of small 10% corrections along the way but those were merely corrections within the context of a longer bull. The 1990-1999 long bull gained 295%. That was the second largest gain surpassed only by the bull market of October 1923 to September 1929 that was up 345%.
According to the Stock Trader’s Almanac 2014, there have been eight bull markets that lasted 1000 days or longer. Only two bull markets were longer than 2000 days, the aforementioned 1923-1929 market and the 1990-1998 market. No bear markets have exceeded 1000 days. The longest bear market occurred from June 1901 and ended in November 1903 a total of 875 days. If there is a general rule bull markets tend to be long with gains averaging roughly 86% and lasting roughly 2 years and bear markets tend to be short and nasty but historically have averaged only 31% and lasting only about 13 months.
But the gains and losses can be deceptive as the range for bull market is 18.4% to 344.5% and for bear markets 13% to 86%. These numbers are for the DJI and other markets can fare better or worse.
If one counts the current bull market as having started in October 2011, the current bull is now into its 856th day. If one counts from March 2009 and sets aside the 2011 mini-bear as a correction only then the current bull market is in its 1,794th day. By that measurement this bull is quite long in the tooth and rapidly approaching the October 2002 to October 2007 bull market that lasted 1,826 days. The average bull market is only 756 days according to the Stock Trader’s Almanac 2014.
Since the major top for the markets in 2000, there have been two bear markets and two bull markets. There is some interesting symmetry. From the time of the 2000 top in March 2000 to the next top in October 2007, it was a period of 91 months. The current market from the October 2007 top has seen the passage of 76 months. Measured from the bottom of the bear markets it was 77 months between the bottom of October 2002 to the bottom of March 2009. Measuring bear bottom to bull top 60 months passed between the bear market bottom of October 2002 to the top of October 2007. March 2014 will mark the 60th month of the current bull market from the March 2009 low. That is assuming the market has not already topped.
2014 is mid-term elections in the US. Traditionally the mid-term election year is the second worst performer of the four-year Presidential cycle. The pre-election year or year 3 of the Presidential cycle is the best performer. But the third year of the Presidential cycle also saw some very nasty bear markets notably in 1903, 1907, and 1931. There have been a few nasty bear markets in mid-term election years as well, notably 1854, 1930, and 1974.
There is a fairly well known 4 and 6-year cycle in stock markets (Merriman – MMA Cycles). These cycles can average out to be 5 years but can range from three to eight years depending on whether one is noting the 4 or the 6 year cycle. The six-year cycle has since 1974 seen lows in 1980, 1987, 1994, 2002 and 2009. The four year cycle from 1974 saw lows in 1978, 1982, 1987, 1990, 1994, 1998, 2002, 2005 (very shallow), 2009 and while it seemed to be early 2011 (two years, seven months). The six-year cycle low would next be due in anywhere from 2014-2017. If 2011 was not the four-year cycle low as the drop was only 16.8% and not the typical 20% plus to define a bear market then the four-year cycle could be making a low in 2014 as that cycle is overdue.
If one goes back further the six-year cycle lows can be noted in 1932, 1938, 1946, 1957, 1962, 1970 and 1974. As a four-year cycle lows were noted in 1932, 1938, 1942, 1946, 1949, 1953, 1957, 1962, 1966, 1970 and 1974. There were distortions to the six-year cycle during that period. The 1953 and 1957 bear markets were not particularly deep with the 1953 bear probably not even qualifying as it was only 13% one of the shallowest on record. But it lasted 8/9 months.
A longer dated cycle is the 18-year one. That cycle can range from 13 to 25 years although it mostly occurs between 15 to 21 years. Since 1974, there was an 18-year cycle low in 1987 and 2002. It is argumentative as to whether 2009 was the 18-year cycle low as it also fell within the range. Assuming 2002 was the 18-year cycle low the next one is due 2015-2021. If one uses 2009 then the next low is not due until 2024-2030. There is potential overlap with the 4 and 6-year cycle lows so the upcoming period could prove to be prescient.
This bull market is long in the tooth. Since January 1, 2014, the DJI has fallen 6.8% and the S&P 500 5%. This has not been the start to the New Year that many expected. However, the decline thus far is merely a correction not a bear market. The January barometer is suggesting that the stock markets could find 2014 rough. Five years up is a long time for a bull market and history suggests that its days could be numbered. Cycles are moving into a period where a bear market could be seen.
How will one know that the market is entering a bear market? Traditionally that is at least a 20% correction. Some numbers one might want to keep in mind that could be clues to an impending bear market are as follows (all figures for the S&P 500): the S&P 500 has already taken out the last weekly low at 1,767; the next weekly low to watch is at 1,646; the monthly low to watch is at 1,560; and, finally the low of 2013 was seen at 1,426 (and was made in January 2013). Taking out previous key weekly, monthly and yearly lows is a sign and a potential confirmation that a bull may have run its course. As well, the 23-month exponential moving average is currently at 1,592. A break and close under that level would be another clue of a potential bear unfolding.
If the current market follows previous patterns than an upwards of a 10%-15% correction could be seen now followed by a return to the highs and even new highs. However, any new highs would not exceed the previous highs by much. In 2007, the final high in October was only 1.4% above the July high. In 2000, the return action high in September fell just short of the March high. These are not unusual patterns – either making a slightly higher high or a slightly lower high following a correction. In 2000, the initial correction off the March high was almost 14%. In 2007, the initial correction off the July high was about 12%.
As well, note the rising or ascending bearish wedges that appeared to form at each of the 2000 and 2007 highs and as well the current market. Note as well the stochastics were often making a series of lower highs before meeting the rising trendlines off important lows. Once these points were broken the market failed to repair itself again. If there are any bear market objectives one has to note that the bottom of the bear channel for the S&P 500 is currently under 600. That zone could act as magnet in a bear market that is similar to the 2000-2002 and 2007-2009 bears.
Bull markets do not last forever. Bullish sentiment remains high. Margin debt is at records. Most market analysts are calling for nothing more than a mild correction. Maybe they are right. Then again, history usually records that most did not see the next mega-bear coming.
Copyright 2014 All rights reserved David Chapman
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-- Published: Thursday, 6 February 2014 | E-Mail | Print | Source: GoldSeek.com
