Investing strategies and secular bear markets

[Hoop]

I think we are hitting the mid stage of a bear market (Denial, Concern, Capitulation). The small caps have already taken big hits, as have the non-performers in the big cap sector. Now we are on to the rerating of the market outperformers (WOW, DJS as examples). Capitulation cant be too far behind :-)

If you are still holding any speculative stocks, or anything with a P/E over the market average, then get rid of them. Buy some of the smaller stocks on P/Es of 4-5 with good dividend yields, then sit back and wait to get back into the big cap sector.

Agree I also think we are passed the early stage of Denial and reaching concern (wave B)

Capitulation...the dreaded wave c we have still to look forward to, just how bad this event will be will define the species of this present bear market whether it's a mild loving teddy or a more dangerous grizzly

[Mick100]

there's going to some grumpy, sore headed bears around by the end of this year

[Mick100]

One of my favourite analysts Dr Copper seems to think so

[Hoop]

Hi Mick

This downturn is a rather strange one, as you point out metals are having good run, not only copper but even steel. This leads one to believe that industry is robust and the demand is strong which makes one question "what recession". Some comentators from very high up places (the fed) indicate that an US recession will not eventuate, others such as equity markets see signals which alway occur just before a recession starts...so who's right?
Well we as investors are experiencing the same questions being asked and same answers being given "is the stockmarket in a bear market phase or not?"
One more thing which complicates matters is the fact that the sharemarket normally downturns to a bear before a recession is confirmed...so at moment there are two camps correction/no recession...bear/recession.

I for what its worth is in the bear/recession camp.
I will outline my reasons when I get time to research thoroughly before posting. At the moment investors should proceed with caution
due to uncertainty.

My economic lecturer back in 1979 said that regulation of markets cuts off the supply of market communication and signals. This was very evident back then under Muldoonism. Today I can can understand these US commentators being polarised as to where this US economy is heading using the same comment as my economic lecturer, confusing signals are transmitted due to the bubble management economic theory. Having confused signals is in iself a warning sign that things may go pop in the middle of the night.

Back to present day the big question is who do you believe...which camp is right is there a middle ground where the fence sitters have a bob eachway and predict a very short shallow recession followed by a resumsion of growth. Who knows??

One thing for sure (via study) is that analysts never get it totalty right, they are too pessimistic in the upturns and too optimistic in the downturns.

Also history is important as many signals appear time after time in the same order before an event happens.

All this + market theory(Dow etc) should be no 1 priority before reading any present today stuff.

Another activity I have been doing is looking back a couple of years and reading research papers from various writers... to see if they were right or wrong. I have mention some of these writers in my earlier posts on this thread.

Today I have read an article written by Chris Ciovacco please when you read this article remember it was written 17 months ago on 17th September 2006.....before the housing market/sub prime mess and at a time when the sharemarkets/property markets where in full Bull market mode.
A couple of comments from Chris' article back then......History tells us that the probability of the Federal Reserve being able to engineer a soft landing in the housing market is very low.
......Once the Internet bubble started to burst, the Federal Reserve tried to engineer a soft landing by cutting interest rates 11 times in just 12 months, moves which are still without precedent today. Despite this aggressive action, we all know that the proverbial soft landing did not occur in the Internet space.
....During the last 16 interest rate cycles, there has been a grand total of one soft landing (see 1994). Using this one historical fact, there is a 6.25% (1/16th) probability that we get a soft landing.
....[SIZE=“3”]"[/SIZE]The total value of residential property in developed countries has increased from $40 trillion to $70 trillion over the past five years (8.2000 to 8.2005), which (as The Economist points out) represents a larger potential bubble in terms of equivalent gross domestic product than either of the stock market bubbles of 2000 or 1929.”

Warning OK Whats going to happen this week or next? TA is showing an ending to this present rally. It could go into a resumption of a more bullish phase or a much better chance that the DOW will test and fail to respect the 12000 support line this may result in at least a 7% loss back to the target index level of 11200 {12000 - (12800-12000)} .If this happens it will be a second phase of the bear market and this phase sometimes does not recognise target indexing and it therefore possible it may fall below 11200.
The globial markets are still in sync.

[Hoop]

Part of Winner69 post (the first post on this thread)

Winner69 has a strategy:

Since 2000 the underlying hypothesis about long term market conditions that drives my investment habits have been

• The US market commenced a secular bear market period in 2000. This followed a secular bull market that run from 1982-1999
• In a secular bear market long term returns are essentially zilch, even though there can be periods when the market can go up more than 20% in any one year.
• Secular bear or bull markets have in the past averaged 13-14 years
• By implication the NZ market is tied to these long term trends

Note:
Term secular means long term more than 10 years.
Assumption
Inference (1) ... the present US secular Bear market should in all probability end in 2014 give or take an year or two.
Inference (2) ..... that the DOW index should be 14000 or less in the year 2014
Inference (3) Long term investing may not be profitable for the next 6 years (unless you better the market each year for the next six years). This will take skill, not luck.
Inference (4) if we are presently in an average length Bear Market (12 -15 months) we may have time for another Bull + bear after that before the market enters a secular bull market phase.
Inference (5) as the secular bear market must end before a bull phase starts (obvious) it can only be a bear market or a depressed flat market in say 2013-14. Therefore if this is a bear market and it lasts for longer than the average this shortens the period of the next Bull phase or lengthens the period of the secular bear passed 2014.

For people who think that this will not happen because of increasing growth in the E part of PE Ratios should read latest Winners Posts or click onto this link

Valuations In U.S. Remain A Concern For The Long-Term Investor:

Quote from the article ...Misconception: Many think that as long as corporate earnings are increasing that stocks will go up right along with them. History paints a much different picture...........

This paints a picture that a bear market phase within the middle of a secular bear market phase may not bode well for a long term investor using the "hold good stocks... bear market strategy" as it may be a long time between drinks.

One can easily see that the above strategy would work OK in a bear market within a secular bull market as the index bounces back in a short matter of time e.g 1987 crash + following bear market.........but a bear in bear???

[Mick100]

this is a copy of a post I made on the first page of this thread - it is as true today as when it was written

I believe we have been in a secular bear market, in general stocks, for the past six yrs as winner has stated.
But if you dig a bit deeper you will find that commodities are negitively corellated to general stocks. When general stocks go into long term bear markets (15-20 yrs) commodities go into long term bull markets - Have a look at charts of the CRB index and the DOW from the late 60s to 1981. this pattern has repeated itself over and over for the last 200 yrs.

Look at a chart of the CRB index since 2001
Look at a chart of crude oil since 2001
Look at a gold chart since 2001
Look at any of the base metal charts since 2001
Then have a look at a chart of the s&p 500

Commodities are going up, general stocks are going sideways

[winner69]

this is a copy of a post I made on the first page of this thread - it is as true today as when it was written

I believe we have been in a secular bear market, in general stocks, for the past six yrs as winner has stated.
But if you dig a bit deeper you will find that commodities are negitively corellated to general stocks. When general stocks go into long term bear markets (15-20 yrs) commodities go into long term bull markets - Have a look at charts of the CRB index and the DOW from the late 60s to 1981. this pattern has repeated itself over and over for the last 200 yrs.

Look at a chart of the CRB index since 2001
Look at a chart of crude oil since 2001
Look at a gold chart since 2001
Look at any of the base metal charts since 2001
Then have a look at a chart of the s&p 500

Commodities are going up, general stocks are going sideways

Correct Mick100 and no doubt you have been well rewarded of your support for commodities over the last few years

One other piece of support for this observation is that (in the US anyway) economic growth during secular bear markets is often greater than during secular bull markets.

What a lot of people don't get is that bear markets are not always earnings related ... bear markets are a result of declining valuation multiples ..... you can have good earnings growth but declining share prices.

Interesting stuff eh Mick100 --- but like you I have my hypothesis and invest accordingly and will do so until proven otherwise

Good to hear your views, they all help to make the big picture a little clearer

[Hoop]

A lot of good feeling in the stock market place at the moment isn't it with stocks rising. Feel like you should be in on some of the action?

At risk of sounding a pessimist.

1 We are experiencing a rally in a bear market
2 The rally is due to end as early as this week
3 Another decline is forecast by Colin Twiggs -9% target on Wall St. Larger than -9% target declines for the FTSE and ASX
4 Media is full of good news....where is the bad news? The bad news is out there but is not in the media spotlight at the moment. Expect bad news to become headlines again in the near future.
5 Available money on credit to the ordinary USA people is drying up fast, this will affect spending. This will also affect share prices as shinking available money forces investors to seek "better opportunity" stocks or other financial instruments, hence lowering PE Ratio values.
6 Is this rally on the NZX as good as you think? Look at the chart below.

This latest rally seen on the chart is nearly non-existent so it has been a very poor bear market rally so far.
It is only the pure traditionalists who thinks this not a bear market now (via definition of what is a Bear Market)

There is no reason to be optimist at the moment ...the chart tells the story better than any other media can.

Warning: A better than average chance of a sharp global market downturn in the short term.

Disc: Cashed up some more of my remaining shares. PPP gone for a 3.5% overall profit (bought 22 Jan 08) Lowered NZO holding. Kept all my PRC.

I am battening down the hatches...they are forecasting another storm is fast approaching.

Disc: Cash 90% stocks 10%

[Hoop]

We can easy be swayed in thinking that the worst is over when people and the media feel optimistic especially when good results appear, and the overall state of the markets are briefly forgotten about.

So just where are we at the moment in this bear market (within the broader secular bear market phase) ?

It seems the world is still following the USA market trend the worlds biggest economy so the DOW index is still very important as an indicator for NZ and OZ, until we decouple no sign of this.

So ignoring all the short term info and disinfo from the media, where is the DOW placed within this latest bear market phase. How long is this bear going to last? How grizzly is this bear going to be?

It is impossible to answer questions about the future accurately but by using history as a guide, one can use historic inferences to get a rough estimate of an possible outcome, which would be (a better than 50 /50) a better guess result.

Having a look at this simple spreadsheet from Crestmont Research gives an insight on the DOW's past with secular bulls and bears markets going back to 1901 and the each year result + PE ratios for each year + inflation figures.

Click on the above link to bring up the spread sheet and note the following:-

During Secular bear markets highP/E figures fall to single figures

Secular bears can be short or long in duration

No real increases and most likely a decrease in the overall index in the secular bear phase (appreciations happens in the secular bull phase).

Yearly index appreciations in secular bull phases are not as big as you would assume. the biggest increase happened in a bear phase The longer the bull the less large yearly index appreciations. Short period bulls have larger index appreciations

P/E ratios increase in secular Bull phases and decrease in Secular Bear phases.

Inflation (CPI) seems to be higher in a secular bear phase (not always) and when a high CPI number is recorded in one year within the bull phase it is usually a down year for the DOW index (not always)

Note that an yearly index can be +ve or -ve in both secular bull or bear phases. Some can be spectacular +82% in 1915 within a secular bear phase.

Can we use this spreadsheet to give us an idea to forecast into the future?

Yes I think we can (Note my opinion only) with better than a 50% - 50% chance of being right.

Using the inferences from this spreadsheet, I deduct that this Secular Bear phase is going to be long (12+ years), possibly 16+ years... so at least to the year 2012 anyway.

Reasons from spreadsheet inferences
Note that all long secular bears have near equal number of +ve years to -ve years while short Secular Bears have very few or no +ve years. This latest secular bear since 2000 has had 4 of each which gives us a foot print that this is going to be a long phase secular bear .

Secular bears that die young* are nasty beasts similarly Secular bulls that die young* are extreme in the opposite direction very feisty beasts. (*young = 4 to 5 years old)

Referring to the P/E Ratios (E being in question with a possible recession) they are presently high and chances are that the secular bear will not end until the P/E ratio falls to below 10 (2007 PE 27 [27 seems high? ..hoop] ).

P/E ratios fall very slowly in a secular bear phase (exception 1929 - 1932 [the big depression knocked PE down rapidly and killed the bear prematurely] )

So the deduction (inferences from the spreadsheet) is that if my forecast is wrong and the secular bear ends prematurely ( under 10 years ) year 2010 it will be because of a short sharp economic damaging depression, or due to an eminent sudden damaging physical collapse (catastrophe) of some other description.

On the brighter side a long secular bear phase normally have mild depreciating years and it is unusual to have more than 2 years of -ve values in a row. So if 2008 is -ve the year 2010 is odds on to be +ve

Click onto the link if you haven't already and look at the figures. It's very easy to follow and it is highly informative..a must look see in my opinion
I have only mentioned a few key points in this post, but looking at those historic figures many other inferences can be deduced.

Have a go and post what other inferences you make out of this spreadsheet

[winner69]

Great post Hoop

That crestmont site has some fascinating stuff doesn't it and confirms what some think in that long term returns from equities (at least in the US and no doubt across the world) are not going to be too flash

Again stock selection is the key (a lot of stocks do go up in bear markets) with a close eye on the charts is the key over the next few years to make money