Investing strategies and secular bear markets

[Hoop]

Mauldin still not too sure where we are but whatever we be OK by 2020 if not wiped out in e anytime

5. I do not believe that the secular bear market in the United States that I began to describe in 1999 has ended. Secular bull markets simply do not begin from valuations like those we have today. Either we began a secular bull market in 2009, or we have one more major correction in front of us. Obviously, I think it is the latter. It has been some time since I’ve discussed the difference between secular bull and bear markets and cyclical bull and bear markets, and I will briefly touch on the topic today and go into much more detail in later letters. For US-focused investors, this is of major importance. The secular bear is not something to be scared of but simply something to be played. It also offers a great deal of opportunity. If I am right, then the next major leg down will bring on the end of the secular bear and the beginning of a very long-term secular bull. We will all get to be geniuses in the 2020s and perhaps even before the last half of this decade runs out. Won’t that be fun? Let’s call the end of the secular bear a 90% probability in five years and move on.

http://www.mauldineconomics.com/fron...sunami-warning

Ouch!!! Mr Mauldin...CAPE (presently at 27) has to fall below 10 to end the secular bear cycle that means if earnings remain strong and earnings for example double in the next 4 years then the S&P will still have to be under 1500 to trigger a new Secular Bull Cycle Market......Hmmmm ...if earnings loses its trend momentum then.....



For the "no worries" people.. (pays to be prepared)
I'm not a great fan of Mark Hulbert but I totally agree with what he says in his article on Marketwatch

With reference to his article ..Ask any Secular Cycle analysts a few years back if they thought these current levels could be achieved 14 years into a secular bear market cycle and they would probably stare back at you wondering if you have rocks in your head for brains

This diagram in the Article speaks volumes and these subjects have been the focus on this thread since day 1

[Hoop]

Methinks the bear market call in the US is a bit premature. Does this look anything like a market in bear territory? (or more like a pullback to the 50 week MA?)...

KW..Secular cycle pressure is invisible on a chart

Secular cycles shows group behavioural state of traders and investors. Their attitudes towards Stocks dictates the trend of CAPE which is the primary driver of secular cycles..Attitudinal shifts are long term trending behavour actions.. and is cyclic.

You get a generation of savers..conservative investors who demand higher yields/less risk from their investments..This behaviour lowers PE (Secular Bear Market Cycle) ..then the next generation are different they are consumers, live in debt, and opt for a more risky, high growth stocks rather than high yield low growth stocks..This behaviour raises the PE (Secular Bull Market Cycle)

The Secular cyclic trend from one to the other (bull/bear/bull,..etc is usually a very slow progression...like the old phrases say "you can't teach an old dog new tricks".. and.."re-inventing the Wheel"

When Secular Bear cycle pressure is at an extreme level (like it is now)...behavioural undercurrents form..such as investors as a group get this uneasy instinctive feeling that something not nice is going to happen..The more the pressure, more people within the group become anxious...There will be a point when a safety discipline surpasses exposure and this is when the market loses momentum and can no longer trend up... when this will occur and what form the cyclic downtrend takes is anyone's guess..But it will happen..because the market runs in cycles...both shorter term cyclic bulls and bears and the much longer secular bulls and bears..

There is a misconception about Secular Bears...it is not bad news as economic growth is similar whether its a secular bull or bear and there can be many cyclic bull markets within a Secular Bear Cycle

[winner69]

Kw ...to show what hoop is on about have a look at this chart of the S&P PE ratio over time
http://www.multpl.com/shiller-pe/

Secular cycles from low PE to high PE and conversely

I have a chart of the ASX PE over time - same problem, was 2009 the start of a secular bull (end secular bear) and if so how much more to go .....or are we in the latter stages oft secular bear cycle which started at turn of century? I post that chart when on areal computer

[winner69]

Fair enough comment KW ....so this time things are really different and we will be doing Ok for years to come.

We are discussing different things though, never mind

[Hoop]

I'm not sure that a trailing 10 year P/E is of much use .......

Fair enough comment KW ....so this time things are really different and we will be doing Ok for years to come.

We are discussing different things though, never mind

KW the reason why Shiller created the trailing 10 year P/E (CAPE) was due to the false signals that P/E and forward P/E produced...

History has seen P/E over and under reported due to the volatile E swings..

How often have you observed investors (including the so called Gurus) unable to answer why the Market went into a cyclic Bear Cycle when the P/E was still under 20..They dimisses it as saying it was a totally unexpected event.

Example:...With the slow process of cyclic reversal in 2008 the early downturn was shallow and as with most cyclic reversals it went undetected until stage 2 when the first capulation wave hits..During the early stages (1) investors couldn't figure out why their portfolios had gone stagnant with more losses than gains..the media keeps pumping out past reports from analysts that PE is still around the average , the business cycle was healthy and so they looked for excuses or blame the market being irrational..
KW.. that scenario sucks in the educated investors to buy on weakness and they were bewildered and pissed off when the "unexpected" first wave hit....Earlier on Shiller developed CAPE as a barometer to measure if the PE and forward PE was falsely under-signaling the real nature of the market...but most investors and commentators at this time did not take much notice of Shiller until his predictions came true.

The cons of CAPE..being a long term indicator it can signal danger..problem is it can signal danger years too early because investor attitudes always lags the market secular trending fundamental data..The market being overvalued (secular=wise) may go unnoticed as volatile variables may sway investor attention and momentum into pushing the markets higher above this so-called theoretical limit..e.g investors attentions are taken up by a sudden upward value surge of reported earnings due to the favourable effect of those volatile variables thus pushing down reported PE.....and going unnoticed is the CAPE which still rises ..creating a platform for CAPE critics to dismiss CAPE as an effective indicator tool.

The classic example is recent history (shows you how quickly people forget..eh?) CAPE fell back from a dizzy crazy 42 during the 2000 bubble but it plateaued around the dangerzone (25-26) back in 2003 to 2006 Secularists see that as a pause before the next leg down because 25 is where most cyclic bull die...with the PE falling to 17 in late 2006..CAPE got criticised by the media as useless for the every day investor and investors continued to accumulate ignoring the invisible risk... when the PE was at 17 and CAPE was 26 history tells us that the S&P500 was only 10% away from its top..

Back to 2015 we have a similar scenario as late 2006, PE around 17 CAPE around 26....

CAPE is not a timing indicator it just shows the theoretical underlying value of the market ...at 26 it is deemed the S&P500 as extremely overvalued...

So when will the bull market end?.. who knows...but the warning bell has rung as long ago as 2013...The smart investors would after the secular warning continue to ride out this Bull market and when that reversal time arrives and the market flops, by being secular aware those smart investors would not suffer denial behaviour and would not be influenced by a still rosy media.

[winner69]

Very good post that was Hoop

[winner69]

I often wonder how 'wrong' forward earnings are in reality? Like does a $1 forecast end up as 90 cents in reality one year later?

I was always intrigued with a US study that came to the conclusion that nearly 20% of today's profits are 'written' off in the subsequent 5 years, But if one keeps normalised earnings outlook that doesn't matter does it.

[Biscuit]

...at 26 it is deemed the S&P500 as extremely overvalued...

Is it extremely overvalued? Back when it was at 23 Shiller said: "...the lesson there is that if you combine that (CAPE) with a good market diversification algorithm, the important thing is that you never get completely in or completely out of stocks. The lower CAPE is, as it gradually gets lower, you gradually move more and more in. So taking that lesson now, CAPE is high, but it’s not super high. I think it looks like stocks should be a substantial part of a portfolio.

.....The other thing is, you don’t have to go into the whole market. You can go into a low-CAPE sector.

http://www.businessinsider.com/rober...#ixzz3OwTOipsG

So, I guess we should be relatively light on shares now or at least be mostly in low CAPE markets. Any idea what the CAPE for NZX is?

[winner69]

I think earnings are always revised down as they get close to reporting date, so there will be some fat trimmed for sure. However, this year will be the first year that the US sees any meaningful economic growth. So I would be interested in knowing if there have been any market crashes during a period of expanding economic growth post a recession.

This is an interesting chart that gives some insights to your question
http://www.aheadofthecurve-thebook.com/04-01.html

[winner69]

I think earnings are always revised down as they get close to reporting date, so there will be some fat trimmed for sure. However, this year will be the first year that the US sees any meaningful economic growth. So I would be interested in knowing if there have been any market crashes during a period of expanding economic growth post a recession.

Here is a chart showing estimates (S&P500) turn out over time