With the global economy and markets roiled by the pandemic, predicting where stocks are headed is particularly challenging these days. Although there is a consensus that the market currently is somewhat overbought, veteran and novice investors alike are uncertain as to what will come next.
To the faint of heart, it may well appear that we find ourselves in uncharted territory. Are we overdue for a ‘correction’ or even a full-fledged ‘bear market’ – or will stock prices continue their lengthy upward trajectory?
Having toiled in the study of technical analysis (and its subdivision, behaviour analysis) for longer than I care to admit, I can attest that, by scrutinizing historical data, one is, in fact, able to discern where things are most likely headed – and to map out their investment strategy accordingly. More about that momentarily.
First an analogy: consider that most sensible folk would not embark on a road trip without a map, or without having planned ahead in terms of anticipated driving distances and times, requisite rest and fuel stops, etc. For instance a drive from Toronto to Montreal via Highway 401 is a distance of some 540 km in ideal weather conditions and should take approximately five and a half hours. But unforeseen events such as a flat tire or breakdown could impact the timetable, causing us to take longer than planned to reach our destination.
That same sort of precautionary approach should be applied to investing: just as you would not set out on a road trip without a map and some sort of timetable in mind, you ought not to embark on an investment strategy without a clear indication of where you are headed and how long the journey is likely to take.
Fortunately, as I already indicated, it is possible even in these crazy Covid times to chart a course that helps us navigate through the various market cycles by scrutinizing historic charts, graphs and data.
At the heart of this art is an understanding of the ‘secular bull’ and ‘secular bear’ markets which, together, characteristically bridge some 40 years. Bull markets (periods of rising prices) generally last 24-26 years, while bear markets (periods of falling prices) tend to be much shorter.
Recent Historic Bull and Bear Markets:
- Bull: 1903 - 1929 (26 years); Bear: 1929 - 1942
- Bull: 1942 - 1966 (24 years); Bear: 1966 - 1974
- Bull: 1974 - 2000 (26 years); Bear: 2000 - 2009
- Bull: 2009 - ?
Each secular bull market subdivides into shorter market cycles which comprise an up-phase (rise) and a down-phase, the latter characterized by a brief dip or pause where volumes and prices plateau as investors opt to take a time out. Think of these pauses as being akin to pulling into a rest stop on Highway 401 for food or fuel during our imaginary Toronto-Montreal road trip. The key point here is that, we planned for such contingencies before heading out.
Which brings us to our present circumstances: we are now 12 years into a secular bull market that began in late 2009. The first cycle extended a mere two years, through 2011, during which the S&P 500 (SPX) gained 103% and subsequently lost 21%. Returning to our road trip analogy, that first cycle would have taken us only from Toronto to, say, Oshawa. No surprise there: the first cycle is typically short, following as it does in the wake of a recently ended bear market. At this point, most investors still believe that the rise is simply a “recovery rally” – a pause – and that the bear is still lurking around, about to pounce and again wreak havoc on stock prices. (The Figure A on the accompanying graphic designates this stage of the cycle as “depression”.) Essentially, negative sentiment still lingers and the typical quote on the Street (stemming from the memory of previous bear-market rallies) is “they are not going to fool me again!”
At any rate, the next cycle lasted five years, to 2016, and transported us from Oshawa to Coburg on our imaginary ‘TripTik’. (Readers of a certain age may recall these paper predecessors to Google Maps and Waze, which were issued by the CAA.) This phase of our journey constituted a recovery cycle, during which bullish sentiment slowly matured (see “Hope and Relief” on Figure A), and propelled major market indices to all-time highs in 2013. The SPX gained 98%, before declining 15% during the subsequent down-phase.
The ensuing cycle (2016-2018) saw the renewal of bullish growth (+62.5%), followed by a negative turn that ended with a 20.2% decline in the SPX. This cycle (labelled “Optimism”), and primarily driven by investment newbies, transported us from Coburg to Belleville enroute to Montreal. Young investors – many of whom ranged in age from 15 to 18 back in 2011, and had never experienced a bear market – heard about the wonders of the bull-market and the opportunities to reap big profits. They rushed in to cash in. That 20%-plus decline registered by the SPX at the end of this cycle was primarily the result of their over-optimism, which created a sell-off that was sharp and – most importantly, due to its size – proved to be a bear-trap. It is highly unlikely that experienced map readers would have confused Belleville with Montreal!
The next phase of our journey, from Belleville to Kingston, was severely disrupted in early 2020 by the unanticipated arrival of the Covid-19 pandemic. We referred to this calamity in our publications as a “flash-crash”, since, technically, it was not part of a conventional cycle. Rather it was reminiscent of the 1987 “crash” in terms of action, direction and outcome: the SPX lost about 35% in both instances. However, in 2020, it took the SPX only five months to recover and hit a new all-time high, as opposed to two years back in the late 1980s. In the wake of both crashes, the SPX not only recovered but subsequently climbed to higher and higher levels. At this writing, the SPX has reached a lofty perch 115% above its March 2020 level. (See “Excitement”.). As Mark Twain said, “History doesn’t repeat itself, but it often rhymes.”
So here we are on our metaphoric road trip, not yet in Kingston (let alone Brockville, Cornwall, or, our final destination, Montreal). Nevertheless, if we were to consult our virtual road map, we’d see that we are currently just 12 years into a secular bull market – which, remember, history tells us is likely to last somewhere around a quarter of a century.
Indeed, the markets do appear to be somewhat overbought these days. But that’s not to say that they are about to collapse. Small corrections notwithstanding, what we are more likely to witness in coming months is our arrival in Kingston in early 2022 (“Thrill”), where we will stop for a quick bite that is evocative of a similar pause experienced in 2018, before hitting the road again towards our final destination. It would not come as a great surprise were non-map-readers to again confuse Kingston with Montreal – unaware that we still must navigate through the final cycle (“Euphoria”) of this secular bull market, where we are likely to witness different symptoms, including numerous stock-splits, before the next bear market.
Our advice? Rest calm. Stay the course and enjoy the ride. It does pay to do your homework, which clearly indicates that history is on our side.
The Globe and Mail
Ron Meisels is the president of Phases & Cycles Inc. (www.phases-cycles.com). He tweets at @Ronsbriefs.
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