David R. Kotok
http://www.NewsAndOpinion.com | We must thank Ned Davis Research (NRD) for the data (Nov. 15th).
NDR dissected the bull and bear markets of the last century in an attempt to distinguish extended ("secular") market cycles from more typical "cycles." Result: 8 big bears and 7 big bulls since 1901. Whether or not we are in the early phase of the 8th big bull or the continuation of the 8th big bear is the question.
NDR defines an extended (secular) bull or bear as a market move lasting "over 660 days" and when the Dow gains or loses "at least 36%."
Of the big bears, one, the Great Depression debacle, lost 89% from top (1929) to bottom (1932). The other seven big bears are reasonably bunched with a decline range of 37% to 52%, average 45%. This assumes the last big bear ended on October 9, 2002.
At Cumberland, we are operating on this assumption. We think the bear bottom is defined by the 7300-7500 Dow bottoming level reached last July and in October and on Sept. 21st, 2001 (futures) and in 1998. See "October 9, 2002, Crossing the Rubicon. Are we facing a financial market meltdown?" http://www.cumber.com/comments/100902.htm.
So what about the next big bull?
NDR's data on big bulls is of lesser value in projecting a long term top. Two huge secular bulls dominate the statistics: the 1974-2000 and 1942-1966, markets gained 1929% and 971% respectively. The other five big bulls range from 66% to 496% and average 257%. The length of time for those five averaged 2154 days or more than double the average length of the big bears.
Does this mean the Dow can reach 18,000 by 2008? Maybe but we doubt it.
If a century of history is a guide, it might see 14-15000 in a few years.
Does this mean it will do so? Of course, we don't know.
But we do know that history is suggesting a secular bottom may have been made on October 9th. And we do know that long period upswings in stock prices start when things look bleak. Bleak forecasts are as common as cell phones.
NDR says "this has been an extended bear market." NDR has not had confirming data to suggest the new secular big bull has started. Ned is "going to insist" that his "indicators confirm a bullish outlook."
My professional career has touched 6 of those 15 secular big bulls or bears. I was born after the other 9 had ended. Ouch! That hurts as I think about becoming a sexagenarian.
Experience counsels that Ned is correct in waiting for the confirming indicators. So what should one do now?
Our decision is to remain invested with broad diversification and using Exchange Traded Funds. Whether
this is going to be for a secular bull or just for a cyclical bull is still an open question. Either way we believe the
path of least resistance for stock market is higher over the next few months.
JWR contributor David R. Kotok is President and Chief Investment Officer of Cumberland Advisors, Inc. His articles and financial market comments have appeared in The New York Times, The Wall Street Journal, Barron's, The Bond Buyer and numerous other publications. He can be seen on CNN, CNNfn and CNBC. Comment by clicking here.
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