Friday, May 1, 2009

Gail Dudack on What's Ahead for the Stock Market

If Climateer Investing can save you the cost of your BusinessWeek subscription, well that's what we're here for! From our April 15 post "Best strategy for long bear market 2010-2020":
Mr. Farrell may be more bearish than necessary. We date the beginning of the secular bear* market to the first quarter of 2000 and use the DJIA's 11,722 close on Jan. 14 of that year. The Nasdaq hit it's all-time high on March 10.

We consider all of the time the market spent above that figure, starting with the Oct. 30, 2006 close at 11,727 through the all-time closing high 14,164.53 on Oct. 9,2007 (coincidentally, five years to the day* from the low of the bust) and back down, to be an anomaly caused by Greenspan's loose-as-a-goose Fed policy. You could probably make the same argument for a portion of the 2004-2006 gains. One more factoid, the 2007 high did not exceed the 2000 high, on an inflation adjusted basis.

The last secular bear is dated 1966 to 1982, eighteen years, roughly equal in length to the 1902-1921 secular bear. For reasons I'll get into in a few months, we believe this cycle will be a bit shorter, call it approximately 15 years, which gets us to 2015 or so....
From BusinessWeek:

The veteran strategist thinks the markets have hit bottom, but the buy-and-hold era is over. And don't expect full recovery anytime soon

Gail Dudack has spent decades deciphering patterns in market moves. At Dudack Research Group, a division of Midwood Securities, she mines market data to find clues to future gains. She figures it could take until 2016 for the Standard & Poor's (MHP) 500-stock index, now at 858, to surpass—and remain above—1550, putting it safely ahead of its 2000 peak. Amy Feldman asked Dudack about her outlook.

You're expecting seven more years of this?

That seems a long time. But we have gone through periods before where the market gets ahead of itself and then corrects because of recession or a series of recessions. Then you have a sequence of bull and bear cycles before you get a bull market that's a sustained advance. The good news is that while we are in a period of weak market performance, we are nine years into it. In my view, we've seen the lowest low of that sequence, and we're likely to have several more cycles before we get a sustained bull market. I would not be surprised if we had another correction of 10% to 20% from higher levels....MORE

Or maybe keep the subscription, they have a nice bar chart of returns:

Secular bears don't necessarily lose money in the index, it's the trending sideways while inflation eats away at you that's the killer, especially since we went off the gold standard.

ClusterStock had a handy chart in their post "Stop Thinking The 30% Stock Rally Means The Bear Market Is Over":

...But, yes, you're right, it's also possible that the recent rally is the start of a Great New Bull Market. Bear markets have always ended eventually (though Japan's hasn't yet). Here's Doug's snapshot of the past hundred years of bear markets, as well as a slide show showing the details how each one ended:


As you can see, there have been instances where declines stopped at the long term trend line.

As you can also see, the 2000 and 2007 peaks were the highest above the trend in the 138 years that the chart covers.

The wonder of leverage.