Travel into Time

In a classic bear market, investors go through three stages. "The earlier stage is characterised by denial, increased anxiety, and fear. The second stage is panic. People suddenly say, 'I've got to sell.' The third phase is despair." Richard Russell.

For the last 100 years, bull markets of 15-20 years long have alternated with bear markets of similar length. It is clear that the last bull market ran from 1982 - 2000, one surmises that we are now in the secular bear market and it still has further to run. Within every secular bear market are sharp rallies that appear to signal a brand new bull, but they are really "sucker" rallies.

For a new bull market to re-establish itself, there will be a need for a new discovery/trend that appears to defy convention. Eg, electronics, internet dotcom. It also needs a new generation of people untainted/burnt by a fall in the market to abandon all caution and lead the charge into stocks again and there must be easy availability of credit (junk bonds financing for LBOs, credit derivatives).

Are the foregoing "conditions" available today? Probably not as we have just experienced one of the longest and strongest bull run in the market with the internet dotcom rush.

Some wise man said that when one sector is thriving, it means that some other sector somewhere is down-throdden as money has flown out into the hot sector. Whilst hot money was chasing stocks in 2000, hell froze over for commodities as their prices plunged into an all time low, not seen since 1930. Another interesting point to note is that commodities cycle and stock market cycles exhibit a negative correlation.

"In truth, a knowledge of history is an investor's best defence against error. Despite all the financial engineering that attempts to eliminate risk, cycles appear to be inevitable as the seasons. Investors who understand these cycles are more likely to survive the winter of a bear market and to avoid its final phase - despair. They know that eventually, summer always returns, and more than that, they know that somewhere on the planet it is always summer," Maggie Mahar.

Market Cycles, S&P 500 Average Annual total real return [Gail Dudack, Sungard]

Period (Years) ----- Total Return

1882 - 1897 (15) ----- 3.4%

1898 - 1902 (04) ----- 15.6%

1903 - 1921 (18)----- 0.6%

1922 - 1929 (7) ----- 25.4%

1930 - 1949 (19) ----- 3.2%

1950 - 1966 (16) ----- 14.1%

1967 - 1982 (15) ----- 0.2%

1983 - 1999 (16) ----- 15.7%

Commodity Market Cycles [Di Tomasso Group]

Period (Years) ----- Return

1939 - 1954 (15) ---- 99%

1954 - 1970 (16) ---- -41%

1970 - 1981 (11) ---- 106%

1981 - 1999 (18) ---- -68%

"History tells us that when you buy stocks with average PE on the S&P 500 under 10, then over the coming 10 years, you will receive a median return of 16.9%. When you buy stocks when PEs are 16 to 17, over the coming 10 years, your median returns will be 10.7%. When you buy stocks when PEs are 18 to 20, then over the coming 10 years, your median return will b 7.5%. When you buy stocks when PEs are 22, then over the coming 10 years, your median return will be 5%. With the S&P fetching more than 30x trailing earnings [in 2003], over the coming 10 years, you'll probably show a loss," Richard Russell, Dow Theory, Summer 2003.