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An Analysis of the Cyclical Bull Markets Within the 1966 to 1982 Secular Bear Market

(Guest Commentary - January 5, 2006)

Dear Subscribers and Readers,

For readers who have been with us for awhile, you may recall that - while nothing is for certain - I had contended in many of our commentaries that we may now be in a secular bear market in stocks that is very similar in nature to the 1966 to 1974 secular bear market.  If so, then we may be in for more of a trendless but volatile market ahead - where stock-picking will get infinitely more difficult and where many individual investors (and hedge funds) will ultimately be driven out of the stock market.  That being said, there were also two significant, cyclical bull markets within that 1966 to 1974 secular bear - during the periods from October 1966 to December 1968 and from May 1970 to January 1973 - where nimble investors or traders could have made a significant amount of money.

I have spoken about these cyclical bull markets on an "on-and-off" basis in our commentaries.  But David Korn, of Begininvesting.com, has taken this a step further and has written an analysis that is intended to chronicle the major market movements during that fateful period.  In doing so, he has also extended his definition of the secular bear market from the period 1966 to 1974 to 1966 to 1982.  Ultimately, it does not matter too much how you label the secular bear market - that period of time in both market history and U.S. history was just plain brutal.  Here's hoping none of you will need to experience anything like this again - but if we do, then knowing what happened in the past will help you immensely with how to navigate the treacherous waters that may be up ahead.

David's newsletter is focused on personal finance, stock market timing, and independent stock market analysis. He also provides a summary and interpretation of the radio show Moneytalk, hosted by Bob Brinker; his newsletter has been published for nearly five years and has a very good investment track record, especially over the last few years.  This is his second commentary for MarketThoughts.com.  His prior guest commentary, "The Six-Month Market Timing Strategy" was published on May 8, 2005.

David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials and Special Alert E-mail Service.  Copyright 2005 David Korn, L.L.C.

Website: http://www.BeginInvesting.com/

INTRODUCTION

I am of the opinion that we are currently in a cyclical (short-term) bull market that is occurring within the context of a secular (long-term) bear market.  I believe the secular bear market that we are currently in began in the first quarter of 2000 when we completed one of the greatest secular bull markets of all time which brought the S&P 500 Index to its closing high of 1527.46 on March 24, 2000.  The Nasdaq Composite reached its all-time high two weeks earlier on March 10, 2000, when it closed at 5048.62.

This is by no means the first secular bear market.  In fact, there have been several secular bear and bull markets in the United States.  By analyzing these patterns, I hope to use the knowledge to be able to better increase the returns of my investment portfolio and help subscribers to my newsletter do the same.  This particular newsletter analyzes the four cyclical bull markets that occurred during the last secular bear market.

DAVID KORN'S ANALYSIS OF THE CYCLICAL BULL MARKETS DURING THE LAST SECULAR BEAR MARKET (February 9, 1966 - August 12, 1982)

The last secular (long-term) bear market occurred over a 16-1/2 year period of time which lasted from 1966 all the way through August of 1982.  During this secular trend, there were four mini-bull markets, or "cyclical" bull markets as many like to refer to them which were of a shorter duration.  

I am going to analyze the cyclical bull markets using the Dow Jones Industrial Average as a proxy.  I like using the Dow for this type of analysis because the historical data on the Dow goes much further back than the S&P 500.

CYCLICAL BULL MARKET NUMBER 1 (October 7, 1966-December 3, 1968)

Date: Dow Jones Price (All based on closing numbers)

10/06/1966: 744.30
11/16/1966: 820.90

As the foregoing numbers show, the Dow began the first cyclical bull market of the 1966-1982 secular bear market at a price level of 744.30.  Hard to imagine now that the Dow is in the 10,000s.  Anyhow, the Dow began its bull journey with a nice 10.3% gain in just about 6 weeks from its bottom.

12/02/1966: 789.50

From November 16th, to December 2, 1966, the Dow made its first correction, pulling back to 789.50 - a decline of 3.83%.

12/12/1966: 820.59

Just 10 days later, the Dow "tested" its previous rally high, by closing at 820.59 -- less than one point away from its prior rally high of 820.90.  What happened then?

12/30/1966: 785.70

The test didn't stand, and the market pulled back, this time even beyond its first correction to 789.50 - a correction of 4.26%.  This "second correction" as I call it, marked the low that this cyclical bull would fall to.  That is an important point to remember.

02/08/1967: 861.00

Badabing!  After correcting the second time to 785.70, the Dow took off strongly, easily passing through its prior rally high of 820.59 and not stopping until about 2 months and one week later, when it reached a new "temporary" rally peak of 861.00.  This marked a gain of 15.68% from the cyclical bull market's beginning in just about 4 months.

02/27/1967: 836.60

Over the next 2-1/2 weeks, the market pulled back a bit to close at 836.60.  You can hardly call this a correction as it constituted a decline of less than 3%.

03/28/1967: 875.30

Badabang!  The moderate decline in February was short lived.  Over the next month, the market rallied and broke through its prior rally high, closing at 875.30 on March 28th - a 17.6% gain off of the low.  

04/10/1967: 842.40

Not even two weeks later, the next pull back was over after a 3.76% decline.  Clearly, the bears were starting to figure out, that the train might be leaving the station without them and the buyers stepped in quickly.   

04/20/1967: 878.60
05/08/1967: 909.60

On April 20, 1967, the Dow closed at 878.60 - a new rally high.  However, it didn't stop there.  Without any significant pullback, the market proceeded further before hitting another inflection point of sorts on May 8, 1967 when it closed at 909.60.

05/31/1967: 852.60

Fadafling!  After May 8th, the bulls took a breather, and the market digested the gains, slowly pulling back until it reached support at 852.60 on May 31, 1967.  Are you sitting down?  You don't need to be for this, I just thought I would ask.  This "correction" if you can call it that, was only a decline of 6.27%.  Look what happened next.

07/21/1967: 909.60
08/09/1967: 926.70
08/30/1967: 893.70
09/14/1967: 929.40
09/25/1967: 943.10

As you can see, it took almost 2 months after the pull back ending on May 31st, for the Dow to reach its rally high of 909.60.  From there, however, the Dow steadily climbed with hardly a look backwards, making new high after new high, before finally closing at 943.10 on September 25, 1967.  

The bulls were probably feeling pretty darn cocky when they saw the Dow close at 943.10 on September 25th.  After all, this marked a 26.7% gain in less than a year.  However, the market was ready to give an age-old lesson.  Nothing moves in a straight line.

11/08/1967: 849.60

Shazam!  From September 25, 1967 to November 8, 1967, the market really pulled back.  Some people on Wall Street define a market "correction" as a decline of 10%.  Well, this decline was 9.92%, and I think it would even fall within their definition.  But the blood wasn't quite over yet.

01/08/1968: 908.90

Two months later, the market had regained its composure, and ran up against a previous formidable resistance level of 909.  You remember 909 right?  Back on May 8, 1967, the Dow had run up against 909.60, before pulling back.  This time, it closed at 908.90!  Clearly, the battle lines were drawn as market participants held their breath.

03/21/1968: 825.10

WOOSH! (Wish I could have thought up a better word than woosh).  The bulls probably felt like they got sucker punched in their stomach.  As of March 21, 1968, the Dow had declined 12.52% from its rally peak and was only 5 points away from its very first rally which ended on November 16, 1966 when the Dow closed at 820.90.  Amazing.

Are you sitting down?  The bears probably were dancing in the streets on March 21st, celebrating the start of spring with the Dow at its lowest level in well over a year.  Mr. Market probably figured that the first day of spring, was as good a time as any to teach the bears a lesson.

07/15/1968: 923.70

SPRING!  A little more than 4 months later, the market had sprung back gaining 11% in a short period of time.  Headed in for the final stretch, the cyclical bull market had 5 more months to go, and what a five months they were!

08/09/1968: 869.70
09/09/1968: 925.00
12/03/1968: 985.20

As you can see, there was one more minor pull back between July 15th and August 9th, when the Dow got as low as 869.70.  From there, however, the market went on a tear rising steadily through the fall of 1968 before the Dow reached its highest close of 985.20 marking the end of the first cyclical bull market in the 1966-1982 secular bear market.  All in all, the Dow gained 32.36% during this cyclical bull market which lasted approximately 26 months.  

CONCLUSION?

What can we discern from this analysis?  Well, first of all we can learn the obvious.  Even in a cyclical bull market, the market doesn't move in a straight line, and there can be several significant pull backs.  On the other hand, the largest pull back was only on the magnitude of 12.52%.  Certainly, there can be merit in waiting for buying opportunities, but as you can see, the moves up can be ferocious at times until the market decides to stick it to the party in charge.  Moreover, there really were not many "buying opportunities" during this cyclical bull market, so if you are going to try and lump sum in, you better hope you don't miss it!  

Studying past bull markets, can also give you the ability to gain a perspective on how the market moves.  Too often, we are unable to see the forest through the trees; or, we follow so closely, that we only see the trees without being conscious of the forest.   

CYCLICAL BULL MARKET NUMBER 2 (May 26, 1970 - January 11, 1973)

This second cyclical bull market began on May 26, 1970 and ended on January 11, 1973.  Before we get to it, let me remind you of where we left off.  The first cyclical bull market ended on December 3, 1968 when the Dow closed at 985.20.  Once the Dow peaked on December 3, 1968, a brutal cyclical bear market commenced which saw the Dow decline from 985.20 all the way down to 631.20 -- a decline of 35.94%.  It bears noting that this cyclical bear market, took the Dow below its level of where it began the first cyclical bull run of 744.30.  

Date: Dow Jones Price (All based on closing numbers)

05/26/1970: 631.20  
06/19/1970: 720.40

As the foregoing numbers show, the Dow began the second cyclical bull market of the 1966-1982 secular bear market at a price level of 631.20.  Hard to imagine now that the Dow is in the 9000s.  The Dow began its bull journey with a hefty 14.13% gain in less than a month!  Contrast that with the first move in the first cyclical bull market which took 6 weeks, but only gained 10.3%.

07/07/1970: 669.40

From June 20th, to July 7, 1970, the Dow made its first correction, pulling back to 669.40 -- a  decline of 7.08%.

07/16/1970: 723.40

It didn't take long to make up the lost ground.  Nine days after the "correction" completed, the market had reached new highs closing at 723.40 on July 16th.

10/08/1970: 777.00
11/09/1970: 777.70
11/10/1970: 777.40

No, I haven't had too much coffee.  Those numbers are correct!  Why so many 777s?  Perhaps there are quite a few gamblers or superstitious people on Wall Street.   Either that, or the numbers 777 just tend to come up a lot.  On three occasions during this cyclical bull market, the Dow found steady resistance at 777.  Coincidentally (or not), 777 was the exact level the Dow closed at when the secular bear market ended on August 12, 1982.  Hence, the resistance became support.  777.  Bizarre.  At least it wasn't 666.  Then, I might get spooked.

12/02/1970: 802.60
03/15/1971: 908.20
04/28/1971: 950.80

The run following the first correction was extraordinary.  After a consolidation period around 777, and a few days where the market closed marginally below that, the market did not look back for a minute.  It was off to the 800s by the beginning of December.  What was striking, is that once the Dow hit 800, it went all the way to 900 without ever falling back into the 700s!  Moreover, once it hit 900, it hardly looked back into the 800s before running up to 950.80.  This run, from July 16, 1970 to April 28, 1971 produced gains of a whopping 31.43%!

08/10/1971: 839.60

Over the next four months, the market finally corrected with the Dow declining about 11.7% to close at 839/60.  

09/08/1971: 920.90

After that correction, the market immediately took a nice bounce producing gains of 9.68% in almost exactly one month.  The bulls were probably getting excited, gearing up for the next leg.  Just about that time, the bears took the field.

11/23/1971: 798.00

When the Dow had its unparalleled 31% rise to 950, there were probably many bulls that didn't think they would see the 700s again.  Turns out, it was only about 7 month later, that the Dow fell below 800, as the difficult end of summer/early fall months exerted pressure on the market.  As measured from the correction bounce to 920.90 on September 8th, the fall to 798.00 represented a decline of 13.35% in about 2-1/2 months.  That is a significant decline.

03/06/1972: 950.20
05/26/1972: 971.30

Four months after falling through 800, the market had made up all of its losses, reaching 950 again -- a level it hadn't visited since almost a year before in April, 1971.  The gains didn't stop there, however, as the market continuing climbing, reaching a new rally high peak of 971.30 on May 26, 1972.  This represented a 21.71% gain in about 6 months from its November lows.

07/20/1972: 910.50

The bears had another chance to get in, only this time it wasn't below 800.  After reaching a new rally high on May 26th, the Dow declined just 6.2% to 910.50.  

08/14/1972: 973.50
10/16/1972: 921.70

As you can see, over the next few months, the Dow went up and tested its prior high of 971.30, managing to break through it by a mere two points, before falling back down again.  This time, it didn't fall as much as before, and 921.70 was about the best price you could get.  I suspect there were many people waiting for a pull back to somewhere in the 800s, but they never saw that.  The level of 921.70 was the bear's last chance to catch the tail end of the bull market.  Hang on to your hat as we head for the finish line!

01/11/1973: 1051.71

The rise from 921.70 was very strong, with hardly a breather along the way.  The market gained 14.10% in the last leg of the cyclical bull market before reaching its highest close of 1051.71 marking the end of the second cyclical bull market in the 1966-1982 secular bear market.  All in all, the Dow gained 66.6% (666!) during this cyclical bull market which lasted approximately 32 months.  

CONCLUSION?

Clearly, one important lesson of cyclical bull markets, is that the market can get away from you fast, just as the current bull market did from its lows on March 11, 2003.

However, just like the cyclical bull market from 1966-1968, the second cyclical bull market had some significant pull backs giving opportunities to get in and capture some gains.  Indeed, in the second year of the cyclical bull market I just analyzed, there were two pull backs in excess of 10%, the first which saw a correction of 11.7%, and the second which saw a correction of 13.35%.  Coincidentally, if you average those two numbers, you get about a 12% correction, which was the largest pullback in the first cyclical bull market.  

CYCLICAL BULL MARKET NUMBER 3 (December 6, 1974 - September 21, 1976)

The third cyclical bull market began on December 6, 1974 and ended on September 21, 1976.   Before we get to it, let me remind you of where we left off and provide some context for this analysis.  The Dow started its first cyclical bull market on October 7, 1966 trading at 744.32.  That first cyclical bull market ended on December 3, 1968, when the Dow closed at 985.20 for a gain of 32.4%!  Once the Dow peaked on December 3, 1968, a brutal cyclical bear market commenced which saw the Dow decline from 985.20 all the way down to 631.20 -- a decline of 35.94%!  It bears noting that this cyclical bear market, took the Dow BELOW its level of where it began the first cyclical bull run of 744.30.  The second cyclical bull market began on May 26, 1970 with the Dow trading at 631.16.  That second cyclical bull market ended on January 11, 1973, when the Dow closed at 1051.70 for a gain of 66.6%!  Once the Dow peaked on January 11, 1973, a second brutal cyclical bear market commenced which saw the Dow decline from 1051.70 all the way down to 577.60 which occurred on December 6, 1974 -- a decline of 45.08%!  This second cyclical bear market took the Dow all the way down --- significantly below where it started during the first cyclical bull market 8 years earlier!  Can you imagine that?  Let's look at it a little differently.  Suppose that you invested in the Dow on October 7, 1966 when it was trading at 744.32.  You decide not to look at your portfolio for 8 years, and then 8 years later, you open up your brokerage statement and voila, the Dow is now trading at 577.60.  That would hurt.  (NOTE: This does not include dividends which would have at least softened the blow a little bit).  Ok, with that backdrop in mind, let's take a closer look at how the market behaved during the 1974-1976 cyclical bull market.   

Date: Dow Jones Price (all based on closing numbers)

12/06/1974: 577.60
03/18/1975: 779.40

Those last two lines took me about 2 hours to get straight.  Why? Because I thought I had missed something and kept checking to see if I had made a mistake.  As the foregoing numbers show, the Dow began the second cyclical bull market of the 1966-1982 secular bear market at a price level of 577.60.  Hard to imagine now that the Dow is in the 9000s.  In just over three months, the Dow gained an whopping 34.93%, without a pullback even as much as 5%.

04/08/1975: 742.20

I almost didn't even include the April 8th entry, as it represented a decline of only 4.78%.  Nevertheless, it was a pullback that lasted over a three-week time frame.  That retrenchment, however, was like a Zen archery master pulling back his arrow to its most optimal point such that its release has the most springboard action.

(I know, I get carried away with these analogies sometimes.  Sorry about that.  I just read Zen and the Art of Archery though, and I must recommend it highly as non-financial great read!)

05/14/1975: 858.70

In just 5 weeks, the Dow shot up 15.58%.  As measured from the beginning of this cyclical bull market, the Dow had gained 48.66% in just under 6 months.

05/29/1975: 815.00

In two weeks, the Dow declined 5.09%.  The bulls were clearly still buying the dips, as a 5% decline is hardly much of a correction.

07/15/1975: 881.80

Six weeks later, the Dow was up another 8.19% as measured from the 5/29/1975 close.  As measured from the beginning of this cyclical bull market, the Dow had gained 52.66% in a little over 7 months.

08/21/1975: 791.70

Finally, a decline of over 10%, although just barely as this 6 week period marked a decline of 10.2% which in some Wall Street circles constitutes an official "correction" for those interested in semantics.  There was still over a year left in this bull market though, and the remaining ride was a bit of a roller coaster.

09/08/1975: 840.10
09/16/1975: 795.10
09/19/1975: 829.80
10/01/1975: 784.20

As you can see, the market bumped around for the next month, with additional opportunities to get in below 800.  The close on October 1, 1975, marked an 11.07% decline from the July 15th high - the largest percentage correction that this cyclical bull market would see.

03/24/1976: 1,009.20

Holy Festivas Mr. Castanza!  The market rallied 28.69% over the next 6 months, with basically no meaningful corrections along the way.  October, 1975 was the last anyone saw the Dow trade in the 700s for this bull market and the close on March 24, 1976, constituted a 74.72% gain as measured from the beginnings of this bull market!  The 1,009.20 marked an area top, as the final stretch of this cyclical bull market would later reveal.

04/09/1976: 968.30
04/21/1976: 1,011.00
06/09/1976: 958.10
07/12/1976: 1,011.20
08/26/1976: 960.40
09/21/1976: 1,014.80

It was almost 6 months after the initial bull market rally top of 1,009.20 was recorded, that this cyclical bull market ended.  During that 6 month period, there were tradable rallies, but the corrections were only about 5% in each case.  The end of this cyclical bull market occurred on September 21, 1976 when the Dow closed at 1,014.80.  This cyclical bull market generated gains of approximately 75.7% over a 21-month time frame.    

CONCLUSION?

The most amazing thing I drew from the analysis of the third cyclical bull market, was  how few substantial corrections there were.  The correction of 10.2% didn't come until 7 months into the bull market, after it had already seen gains of 52%.  

Hmm.  I just thought of something.  Follow along with me here, as I type out my thoughts simultaneously as they come to my mind -- a scary proposition I realize.  The 10.2% correction in the 1974 - 1976 cyclical bear market occurred in 1975 - the year before the presidential election.  Remember Jeff Hirsch's quote, "There is a "well-documented tendency for the market to register double-digit returns in a pre-election year and to produce gains on average of 51% from the mid-election-year low to the pre-election year high."  Well, in this case, the Dow had gained 52.66% in 7 months going into the pre-election year before its 10% correction.  Perhaps market participants at the time decided to take profits knowing that statistical average, as it seemed to occur almost simultaneously at that exact moment.  Just a thought, but something to consider.

With my analysis of the three cyclical bull markets complete, they all have one thing in common.  The largest corrections come in the range of 10%-13%.  Absent that type of correction, you are left with retrenchments that usually aren't greater than a few percentage points, typically capping out at 5%.

CYCLICAL BULL MARKET NUMBER 4 (February 28, 1978 - April 27, 1981)

The fourth cyclical bull market began on February 28, 1978 and ended on April 27, 1981.  This was the longest cyclical bull market during that secular bear market, lasting 3 years and two months!   

Before we get to it, let me remind you of where we left off and provide some context for this analysis.

The Dow started its first cyclical bull market on October 7, 1966 trading at 744.32.  That first cyclical bull market ended on December 3, 1968, when the Dow closed at 985.20 for a gain of 32.4%.  

Once the Dow peaked on December 3, 1968, a brutal cyclical bear market commenced which saw the Dow decline from 985.20 all the way down to 631.20 -- a decline of 35.94%!  It bears noting that this cyclical bear market, took the Dow BELOW its level of where it began the first cyclical bull run of 744.30.  

The second cyclical bull market began on May 26, 1970 with the Dow trading at 631.16.  That second cyclical bull market ended on January 11, 1973, when the Dow closed at 1051.70 for a gain of 66.6%!   

Once the Dow peaked on January 11, 1973, another brutal cyclical bear market commenced which saw the Dow decline from 1051.70 all the way down to 577.60 which occurred on December 6, 1974 -- a decline of 45.08%!  HOLY SMOKES!!!

This second cyclical bear market took the Dow all the way down --- significantly below where it started during the first cyclical bull market 8 years earlier!  Can you imagine that?  The Dow went from 744.32 on October 7, 1966, and was trading at 577.60 years later.  (NOTE: This does not include dividends which would have at least softened the blow a little bit).

The third cyclical bull market began on December 6, 1974 with the Dow trading at 577.60.  The end of this cyclical bull market occurred on September 21, 1976 when the Dow closed at 1,014.80.  This cyclical bull market generated gains of approximately 75.7% over a 21-month time frame.  YOWSA!   

Following the third cyclical bull market peak on September 21, 1976, another brutal cyclical bear market commenced.  This time, the Dow declined from 1014.80, down to 742.10 where it closed on September 28, 1978.  This marked a decline of 26.88% in just about 2 years time.  Notably, this cyclical bear market ended with the Dow closing at 742.10 -- just two points below where the first cyclical bull market began at 744.32 on October 7, 1966.  Pretty amazing how close those numbers were.

Ok, with that backdrop in mind, let's take a closer look at how the market behaved during the 1978-1981 cyclical bull market.  

CYCLICAL BULL MARKET NUMBER 4 (February 28, 1978 - April 27, 1981)

Date: Dow Jones Price (all based on closing numbers)

02/28/1978: 742.10
06/08/1978: 866.50

The cyclical bull market got off to a rousing start, as cyclical bull markets tend to do.  Here we had gains of 16.76% in less than 4 months, with hardly a pullback worth sneezing about.

07/05/1978: 805.80

About a month later, the market had corrected nicely, down about 7%.  Investors who bought in at this level were rewarded very shortly.

09/06/1978: 907.70
09/11/1978: 907.70

In just two months, the Dow had rocketed ahead, up 12.6%.  A bit of technical analysis might have helped you identify an inflection point here.  Note that the Dow closed at 907.70 on Friday, September 11, 1978.  That Friday preceded a long weekend (Monday was a holiday), and the Dow closed at the same level on Tuesday.  However, if you looked behind the numbers on that Tuesday, you would have noticed that the close came on less volume, along with a lower intra-day low.  A sharp decline followed, and it would take over a year before the market reached these levels again.

11/14/1978: 785.30

In the two months following that bull market high, the Dow declined 13.49%.   This falls squarely within the range of 10%-15% which some market gurus refer to as a "correction."

01/26/1979: 866.50

Two months later and now into a new calendar year, the Dow gained a solid 10.3%.  Profit takers were quick, however, to step in.

02/27/1979: 807.00

Another inflection point was established on February 27, 1979.  This provided a great opportunity for those that missed the original bottom of the cyclical bull market.  Notably, this came on the eve of the one-year anniversary of this cyclical bull market.

04/10/1979: 878.70
06/01/1979: 821.20  
10/05/1979: 897.60

Over the next 8 months, the Dow rose and fell, before finally reaching another inflection point on October 4, 1979, when it closed at 897.60.  Note that the Dow still had not managed to eclipse its cyclical bull market high of 907.70 which had occurred in September of the prior year.  Everyone was feeling pretty peachy, at the beginning of October.  Little did they know what was in store for them...

11/07/1979: 796.70

Holy Bear Batman!  In just over a month, the Dow had suffered another double-digit decline of 11.25%.  Psychologically, this must have thrown the bears for a loop, as the Dow had fallen below the psychological 800 level, and the cyclical bull market was already 21 months old!  Recall that this cyclical bull market had begun when the Dow was trading at 742.10, so this level provided a great opportunity to get back in if you had been waiting for an entry point near the lows.

02/13/1980: 903.80

Although the 800 barrier had been broken in early November, 1979, just three months later, the 900 barrier was broken as the bulls cheered going into the 2 year anniversary of this cyclical bull market.  

03/27/1980: 760.00

WHOA NELLIE!  Are you reading that last number right?  Did the Red Sox really lose?  Did the Saints really win?  The answer to all of these questions is yes.  In just about 6 weeks time, the Dow suffered a major blow, declining a whopping 15.92%!  Some market timers call this an "intermediate" correction as it broke through the 15% range.  This decline was one of the most substantial corrections in any of the cyclical bull markets I have analyzed.  It was so large, that it brought the Dow within less than 2-1/2% off the low where this cyclical bull market began.  This decline had shaken the bulls confidence though, and the market struggled for a bit as these next numbers show:

04/11/1980: 791.60
04/21/1980: 759.10

During the next month, the Dow managed to climb only about 31 points failing to break through 800, before it declined, and tested the low set in March.  There were a lot of positive divergences on this test, with volume about one-third of what it had been on March 27th.  This evidenced that the number of sellers had dried up dramatically, despite a new low having been set on April 21st.  If you were brave enough to jump in here, you would be rewarded with a watermelon smile.

09/22/1980: 974.60

As Bart Simpson would say, AYE CARUMBA!  In just five months, the Dow gained over 28%, slicing through 800, dicing through 900, and mincing through the bull market highs of 2 years earlier.  If you were invested during that time, you would easily have been able to afford the "Quick Chop."

http://www.harrietcarter.net/proquickchop.html

10/30/1980: 917.80

Following those extraordinary gains, some profit taking was inevitable.  Here, we saw a 5.83% decline in just over a month.  The market action here reminds me of some of the paltry corrections we have seen in our present cyclical bull market.

11/20/1980: 1,000.20
12/15/1980: 911.60
01/06/1981: 1,004.70
02/13/1981: 931.60
04/27/1981: 1,024.10  (END OF CYCLICAL BULL MARKET)

For the next six months, it was a trader's market.  As you can see, the market was very volatile, with swings in excess of 5% occurring every month or two.  The end of this cyclical bull market occurred on April 27, 1981 when the Dow closed at 1,024.10.  This cyclical bull market generated gains of approximately 38.0% over a 38-month time frame.   

CONCLUSION?

Clearly, one important lesson of cyclical bull markets, is that the market can get away from you fast.  The fourth cyclical bull market was very volatile, and it seemed to offer a lot more significant corrections than some of the other cyclical bull markets.  The 4th cyclical bull market, like the other three cyclical bull markets, had a correction in excess of 10%, and one even in excess of 15%.  This is something to "bear" in mind if you are trying to find a reentry point and believe that we will get another significant correction during this cyclical bull market.

It also deserves pointing out that the presidential election cycle seems to have impacted this cyclical bull market as well.  The bear market bottom occurred in February of 1978 -- a mid-term election year low.  This produced gains of 21% going into 1979 -- the year before the presidential election.  Remember Jeff Hirsch's quote from the Stock Trader's Almanac? "There is a "well-documented tendency for the market to register double-digit returns in a pre-election year and to produce gains on average of 51% from the mid-election-year low to the pre-election year high."  Well, in this case, the Dow had gained 21% from February 28, 1978 to October 5, 1979.  Not quite the historical average, but double-digit gains nevertheless.

With my analysis of the four cyclical bull markets complete, they all have one thing in common.  The largest corrections come in the range of 10%-16%.  Absent that type of correction, you are left with retrenchments that usually aren't greater than a few percentage points, typically capping out in the 4%-7% range.

Another lesson to glean from this analysis, is if you are going to try and catch a correction bottom and lump sum your money in, you have to be very accurate, otherwise the market could get away from you before you know it.  On the other hand, you have to be patient to catch bottoms, while simultaneously recognizing that if you wait for a particular price level, the market may not accommodate your wishes.  The way to avoid that, is to dollar cost average back into the market, using periods of weakness if at all possible.    

I hope you enjoyed this analysis.  I will be analyzing the cyclical bull markets that occurred doing the secular bear market that occurred from 1929-1949 in a future newsletter.  If you have any questions, please do not hesitate to drop me a line.  - David

DISCLAIMER:
 The information contained in this newsletter is not intended to constitute financial advice and is not a recommendation or solicitation to buy, sell or hold any security. This newsletter is strictly informational and educational and is not to be construed as any kind of financial advice, investment advice or legal advice. Copyright David Korn, L.L.C. 2005

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