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Long Term Update

Long Term Update

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Published by TheShortSideOfLong
Stocks, Bonds, Commodities, Currencies, Financial Markets, Market Crash, Bear Market, Bull Market, Global Economy, US Economy, Recession, S&P 500, Dow Jones, Emerging Markets, Fund Flows, Sentiment, Volatility Index
Stocks, Bonds, Commodities, Currencies, Financial Markets, Market Crash, Bear Market, Bull Market, Global Economy, US Economy, Recession, S&P 500, Dow Jones, Emerging Markets, Fund Flows, Sentiment, Volatility Index

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Categories:Business/Law, Finance
Published by: TheShortSideOfLong on Aug 11, 2011
Copyright:Attribution Non-commercial


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This post is mainly addressed to the large number of perma bears, who have justrecently come out of hibernation! Welcome back guys, but be careful, becausethe glory days of 2008 might not last as long this time!
Majority of the time on this blog I tend to do updates from the short to mediumterm perspective (
Quick Market Update)
as I follow the markets movements andfluctuations. After all, the blog is used as my own investment dairy and writingthoughts to paper helps one try and understand the huge volumes of data andnews all of us are hit with on a day to day basis. With all that noise in thebackground, sometimes it is very easy to lose the long term picture, which in myopinion is far more important.For those that did not see the last long term update, pleaseclick here.Theupdate warned on a potential turn coming up, where a cyclical bull couldpotentially end. Even though admittedly I was not extremely bearish, I wroteback then that:
Since the cyclical bull market began on 09th of March 2009, ithas lasted over 121 weeks and so far has gained 87.5%. As youmay remember, the gain was over 100% at one point beforethe May and June correction started. While an averagecyclical bull market tends to last 155 weeks with an average gain of 100%, the cyclical bull markets within a secular bear market tend to last only 126 weeks with gains of about 100%  plus. So therefore by all definitions, we have achieved thataverage.Note: The historical data in the bar chart above is complied since 1929 for theS&P 500.
Majority of the global equity sectors and indices fell below 20% during the lastweek of trading, indicating that we are pretty much in a new cyclical bearmarket, even if it only ends up being a short lived panic crash like in 1962, 1987and 1998 (yes I do read a lot of history).
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During Tuesday's intra day trade, S&P 500 briefly dropped below the 20% thresholdwhich classifies it as a bear market. Therefore if we take that as a new cue, thanfrom the chart above, we can see that the cyclical bull market lasted 112 weeksfrom 09th of March 2009 until 02nd of May 2011. The bull market achieved gainsof 106% from the intra day low to intra day high. While the length was a bitshorter than expected, gains were very strong!Statistics show that during secular bear markets, cyclical bears can last up to 109weeks. However, majority of the time, cyclical bear markets last about 74 weeksor just a little bit more than a year. More important than the time it takes toconsolidate or correct, is the percentage point loss that the bear market takesaway. The chart above shows that historically, bear markets since 1929 take away36% on average. During secular bear markets this can be as high as 46%, but it isobviously skewed by the volatile 1930s. If the bear market goes down 25% or so,we will be testing a major support at around 1040 area - so keep that in mind.My own secular bear market model was right on que, as can be seen from thechart above. I personally thought that the cyclical bull market from March 2009could go a bit higher before it sucks in more investors. However, judging by thedeclines in majority of the sectors, the cyclical bear has most likely alreadybegan. Now, I do not think majority of the losses will be from percentage gains. Ibelieve majority of the losses will be from inflation adjustment as the market willnot go below March 2009 lows. Therefore equity markets could trade somewhatsideways over the next 5 to 10 years.Let me explain...
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The 1901 secular bear market lasted 20 years and topped at the start of thecentury, just like the 2000 secular bear market. It actually made a new nominalhigh in 1907, but still lost 67% from peak to trough, adjusted for inflation.However, nominally the market moved sideways for almost two decades and innominal terms, actually bottomed in 1914.The 1929 secular bear market was a pure force of negativity, pain, suffering andstaggering market losses. However, majority of the market losses occurred in thefirst 3 years, when the market bottomed nominally in 1932. Majority of theeconomic pain lasted for decades, but majority of investors fail to understandthat markets discount news ahead of time, sometimes years and years out (this iswhat the 2008 crash most likely did).The 1966 secular bear market was a huge inflation problem after Nixon took awaythe Gold standard. The market lost 60% in inflation adjusted terms by 1982 lows.The bear market lasted for 17 years or so. However, nominally the market movedsideways for almost two decades and in nominal terms actually bottomed duringthe famous 1974 bear market - not that anyone knew it back that, because justlike today, they were too busy being perm bearish due to bad economicconditions.
However, as already stated, markets discount bad economic conditions yearsbefore they end. By the time you wait for the unemployment rate to drop from 9% to 6% and for de-leveraging to occur, the market will already leaveyou behind.
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