Secular Bull and Bear Markets; Cyclical Bull and Bear Markets

According to Wikipedia, "A secular market trend is a long-term trend that usually lasts 5 to 25 years (but whose distribution is more or less bell shaped around 17 years, in the stock market), and consists of sequential 'primary' trends."

A Cyclical Market trend is a shorter term trend lasting around two to four years.

A Bull Market "tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of future price increases and future capital gains."

A Bear Market, "is described as being accompanied by widespread pessimism. Investors anticipating further losses are often motivated to sell, with negative sentiment feeding on itself in a vicious circle."

Some would refer to the current market starting in 2000 as the beginning of a longer term Secular Bear Market, with a Cyclical Bull Market occurring between 2003 and 2007.

Secular Markets in History

Market Analysts and Historians would group the stock market periods from 1906 between Secular Bull Markets and Secular Bear Markets.

One grouping (by Amateur-Investor.net), would be as follows:

1. 1906-1921: Secular BEAR Market
   
2. 1922-1928: Secular BULL Market
   
3. 1929-1949: Secular BEAR Market
   
4. 1950-1965: Secular BULL Market
   
5. 1966-1982: Secular BEAR Market
   
6. 1983-1999: Secular BULL Market
   
7. 2000-????: Secular BEAR Market
   

How the 1950 to 1965 Secular BULL Market Looked Like



The Clear Trend is a powerful Bull Market.

A Buy the Dip strategy would have been profitable during this period.

How the 1966 to 1982 Secular BEAR Market Looked Like



Many say that we are in the middle of a Secular Bear Market which started in 2000.

If this is so, then we can look at the last Secular Bear Market, the Period between 1966 to 1982.

What is interesting is that even in this Bear Market, the Stock Market did rise, but at a much slower rate than during a Secular Bull Market. The Average Yearly Return on the S&P 500 (according to Amateur-Investor.net) during this period was 3.64%. Compare this to the Secular Bull Markets from 1922-1928 (17.90%), 1950-1965 (11.40%) and 1983-1999 (14.96%).

Also notice the general sideways action but with violent swings in the market.

We see Drops of 33%, 47%, and 23%, and Gains of 42%, 64%, and 122%.

So even in Bear Markets, it is possible to make good gains in the market if traded correctly. Of course, trading correctly (and calling market tops and bottoms) is difficult.

Using an index strategy, it would appear that even in Bear Markets, buying the index when the market drops 30% to 40% from a market peak would be profitable, in preparation for the next big gain in the next Secular Bull Market.

In fact, this blog studied the one year forward return based on an index's relation between the 52 week high and 52 week low. The more overextended the index in relation to the 52 week high (and the more underextended the index in relation to the 52 week low), the greater the one year forward return.

How the 1983 to 1999 Secular BULL Market Looked Like



Clearly, the primary market trend during this long period was up. There was a scary drop in 1987 (Black Monday), but during this entire period, this drop was just a small blip.

Accumulating stocks/equity during the long bear market from 1966 to 1982 would have paid off before the start of the powerful 1983 to 1999 Secular Bull Market.

How the 2000 to ???? Secular BEAR Market Looks Like



If we are in a Secular Bear Market lasting around 17 years, then if the Secular Bear Market started in 2000, the Secular Bear will end around 2016.

If the 1966 to 1982 market is any indication, we will be in for a wild ride in the market, as we have already experienced.


Today's S&P 500 Chart

Stock Market and S&P 500 Bottom Indicator Based on Extension from 52 Week Low and 52 Week High

Is there a stock market (or S&P 500) bottom indicator based on the current (S&P 500)index value in relation to the 52 week high and 52 week low?

After research, there appears to be a bottom indicator based on these values.

The Equation

The thesis we wanted to test involves this equation:

HOLU Function = (% Below 52 Week High) - (% Above 52 Week Low)

In order to find a bottom, we wish to maximize The HOLU Function (HOLU = High Overextended Low Underextended).

Theory Behind the Equation

The theory is that we want to:

1. Maximize the Percentage Below the 52 Week High:
   
   The Greater the Percentage Below the 52 week high, the more likely the market has overextended to the downside, and the bottom may be near.
   
   
2. Minimize the Percentage Above the 52 Week Low:
   
   The stock market axiom "Buy low, Sell High", appears to be true, and minimizing the percentage above the 52 Week Low is a goal.
   

So by combining both goals, we have created the HOLU Function above and we wish to maximize the value.

Method

We used data on the S&P 500 From 1950 to March 31, 2008. We looked at the HOLU Function values in relation to the forward one year return on the S&P 500. We averaged the one year forward return on the S&P 500 based on different cutoff values.

The Results



In the chart above, if we have a HOLU Value greater than 10%, the average one year forward S&P 500 return is 13.55%, many percentage points above the average one year forward S&P 500 return of 8.51% if the HOLU value is less than or equal to 10%.

When we use a larger cutoff HOLU value of 20%, we get even better results, 18.26% to 8.82%. If we have HOLU Values greater than 30%, we have the largest gain, an average one year forward S&P 500 return of 22.13% (compared to 8.97%).

So the HOLU Function/Equation above appears to generally true. With HOLU Values above 10%, 20% or 30%, we increase our chances of having a good one year forward return if we can assume that history holds. We can use a high HOLU Value above 20% or 30% as a stock market (S&P 500) bottom indicator.

Sample Bottom Days

Here is a sample of the 59 days where the HOLU Value is greater than 30%.

Date	HOLU	One Year Fwd Return	% Below 52WeekHigh	% Above 52WeekLow
10/9/2002	33.75%	33.79%	33.75%	0%
7/23/2002	34.65%	22.70%	34.65%	0%
9/21/2001	33.84%	-12.68%	33.84%	0%
12/4/1987	33.51%	22.23%	33.51%	0%
10/19/1987	33.24%	22.41%	33.24%	0%
12/6/1974	30.48%	34.75%	34.86%	4.38%
10/3/1974	44.11%	34.16%	44.11%	0%
9/13/1974	41.49%	28.51%	41.49%	0%
5/26/1970	33.03%	46.21%	33.03%	0%

Please note that October 19, 1987 is Black Monday!

Today's Value

As of March 31, 2008, the S&P 500 is 1322.70. 52 Week high is 1565.15 and 52 Week Low is 1273.37 (Closing Low).

HOLU = (% Below 52 Week High) - (% Above 52 Week Low)
= 15.49% - 3.87%
= 11.62%

While we would like HOLU values greater than 30%, 11.62% seems like a decent HOLU value if we look forward one year to the future.

Other Bottom Indicators

1. Stocks above 50 and 200 Day Moving Average
   
2. Put-Call Ratio
   
3. New High-Low Index
   
4. Ratio of Stocks Above 200 Day Moving Average to 50 Day Moving Average.
   
5. Bull Bear Ratio and Bullish Percentage
   
6. Oscillators