Wednesday

Are We in a Secular Bull or Secular Bear?

Post a Comment September 1, 2010 – 4:14 pm |   | Permalink |  Print This Post |

This fantastic analysis is by  Doug Short from www.dshort.com - his feeds have been added to our finance and trading network Investoridol so that readers can tune in directly to his articles. His work is excellent and a gold mine which will no doubt save you hours of hardwork crunching numbers and drawing charts on Excel (Doug is the charting guru). Most charts date back to 1870s. We are glad we stumbled onto Doug’s site whilst researching on the Nikkei and would like to share it with you.

To Doug, thanks for the great work.

Enjoy.

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If we study the data underlying the chart, we can extract a number of interesting facts about these secular patterns:

The annualized rate of growth since 1871 is 1.91%. If that seems incredibly low, remember that the chart shows “real” price growth, excluding inflation and dividends. If we factor in the dividend yield, we get an annualized return of 6.58%. Yes, dividends make a difference. Unfortunately that has been less true during the past three decades than in earlier times. When we let Excel draw a regression through the data, the slope is an even lower annualized rate of 1.70% (see the regression section below for further explanation).

If we added in the value lost from inflation, the “nominal” annualized return comes to 8.79% — the number commonly reported in the popular press. But for an accurate view of the purchasing power of our returns, we’ll stick to “real” numbers.

Since that first trough in 1877 to the March 2009 low:

• Secular bull gains totaled 2075% for an average of 415%.
• Secular bear losses totaled -329% for an average of -65%.
• Secular bull years total 80 versus 52 for the bears, a 60:40 ratio.

This last bullet probably comes as a surprise to many people. Until the recent gloom descended over the investment horizon, the finance industry and media have conditioned us to view every dip as a buying opportunity. If we understand that bear markets have accounted for 40% of the past 122 years, we can see the current market in a more realistic context.Based on the real S&P Composite monthly averages of daily closes, the S&P is 40% above the 2009 low, which is still 42% below the 2000 high. The 2009 low measures about 6% above the average decline for secular bear markets. Of course, this number is a bit skewed by the bottom in 1932, which saw a greater decline over a much shorter period (three years versus nine).

Add a Regression Trend Line

Let’s review the same chart, this time with a regression trend line through the data.

Click to View

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This line essentially divides the monthly values so that the total distance of the data points above the line equals the total distance below. Remember that 1.91% annualized rate of growth since 1871? The slope of this line, an annualized rate of 1.70%, approximates that number. The 0.21% difference is largely a result of the rally over the past 16 months.

Regression to trend usually means overshooting to the other side. The latest monthly average of daily closes is 28% above trend after having fallen only 6% below trend in March of last year. Previous bottoms were considerably further below trend.

Will the March 2009 bottom be different? Only time will tell.