Could the Dow Finally Bottom in 2017?
Ryan Detrick (rdetrick@sir-inc.com)
7/9/2004 3:08 PM ET
7/9/2004 3:08 PM ET
Looking back at the past one hundred years of stock market history, one thing stands out more than anything else. The Dow Jones Industrial Average moves in very long patterns that are known as secular moves. In the simplest terms, a secular bull market is an extended time frame (between 10 and 20 years) where prices increase. On the other hand, a secular bear market is an extended time frame where prices move sideways to down. Examining past bull and bear markets, there is a very good chance that we have entered another secular bear market that potentially won't find its ultimate bottom until May 2017.
Below is data that I was able to compile from our quantitative analysis database. I only examined the Dow because it is the only exchange that has been around since 1906.
I determined how long the secular market lasted by finding the Dow's ultimate daily closing low and the ultimate closing high (or vice-versa for a bear market). It is obvious by looking at the results that buying and holding would have made you a lot of money in bull times, but you would have been better off in cash during bear times.
The average bull market lasted 168 months or exactly 14 years. Indexing, buying, and holding blue chips would have been a very good strategy during one of these periods. All you had to do was buy, wait a decade or so, and watch the gains come into your portfolio.
Unfortunately, accompanying every bull market was a bear market. The average bear market from top to bottom lasted 208 months or 17 years and 4 months. From this we can conclude that the ultimate bottom may not occur in the Dow until May 2017.
There is no way of knowing whether history will hold true this time around or not, but I think it is a very important concept of which the average investor needs to be aware. The most recent bull market has brain washed investors into thinking that if you "buy and hold" blue-chip stocks then you will come out ahead in the end. While this statement may currently be true, it could take decades to realize a profit.
I realize that during these secular moves we will see counter moves (called cyclical moves) that will usually last a year or two. If we are in a new secular bear market, then the October 2002 to February 2004 rally is a classic example of a cyclical bull market within a secular bear market. Here at Schaeffer's we were able to recognize this trend. That is why we were bullish on technology, autos, and gold throughout 2003, garnering some monster returns from those sectors. Turning to this year, we see the masses quickly turning bullish, predicting wonderful returns in the markets for a second straight year. Being contrarians, we moved opposite of the crowd and said that 2004 would be a down year for U.S. stock markets. But this doesn't mean that gains in certain sectors aren't possible if you looked hard enough. We recommended investing in autos, energy companies, some exposure to gold as insurance, and keeping a healthy amount in cash. All but gold have performed extremely well so far year-to-date. However, the yellow metal has begun to show signs of life recently as the U.S. dollar, which trades inversely with gold, is beginning to look top heavy.
Turning to the major index returns so far this year, the Nasdaq, S&P 500 Index, and Dow were all negative for the year as of this morning. In other words, after listening to all of the experts telling you how high the market averages would soar this year, you would have been better off keeping your portfolios in cash the first six and a half months of 2004. Here at Schaeffer's, we consider the upcoming earnings season and how stock's react to it as being the deciding factor for the rest of the year's performance. If the first-half of the year couldn't rally stocks after very strong earnings and positive economic news, you have to wonder what can.
In conclusion, it is important to realize that we may see sideways to negative returns for quite sometime, with several pockets of strength thrown into the mix. History tells us that we had better be on the lookout for alternative investment strategies, rather than simply "buying and holding," if we want to see gains in our portfolios.
Ryan Detrick (rdetrick@sir-inc.com)
[with permission
That was a blast from the pastJ
Feel free to use it. thanks.
- Ryan Detrick
