Dat­ing bull mar­kets from bear mar­ket lows cre­ates con­fu­sion

The Buffalo News - - BUSI­NESS -

noted in 2003, bear mar­kets con­tain “vi­cious ral­lies and wicked sell-offs – over shorter term cy­cles – within the larger time­line.” Just look at the sec­u­lar bear mar­ket that ran from 20002013 for re­cent ex­am­ples.

Per­haps the most in­struc­tive case is the bear mar­ket that stretched from 1966 to 1982. The Dow kissed 1000 in 1966 and never got higher on a per­ma­nent ba­sis un­til 1982. That pe­riod con­sisted of four ral­lies of 32 per­cent, 67 per­cent, 75 per­cent and 38 per­cent – all of which failed. The 2003-2007 cycli­cal rally saw mar­kets nearly dou­ble – it also failed into the teeth of the fi­nan­cial cri­sis.

There is a rea­son why hedge funds con­tain a “high-wa­ter mark” be­fore their per­for­mance fees kick in: In­vestors don’t want to pay 20 per­cent for gains that sim­ply re­trace prior moves. To garner those fees, both fund man­agers and mar­kets need to make new highs.

Of course, we never know this in­for­ma­tion un­til long af­ter the fact. Dat­ing the bull mar­ket’s be­gin­ning to these lows looks more like a case of hind­sight bias than any­thing that might be use­ful to traders or in­vestors in real time.

2. Bull mar­kets need to eclipse the prior trad­ing range by mak­ing new highs. To un­der­stand why new bull mar­kets need to make new highs, con­sider the prior trad­ing range that came be­fore. These long range-bound mar­kets ex­ist for a spe­cific rea­son: Prior mar­ket highs, espe­cially in bub­bles, tend to steal gains from the fu­ture.

Val­u­a­tions and it can take years for earn­ings to catch up. These long pe­ri­ods of upand-down trad­ing al­low eq­ui­ties to work off those ex­cess prices. It can take a decade or longer for this to oc­cur.

Con­sider the enor­mous sec­u­lar run of the Ja­panese Nikkei from 1965 to 1989. The pe­riod in­cluded a 5,000 per­cent, 30-year in­crease in real es­tate prices and a stock mar­ket that ended up twice as ex­pen­sive as the Nas­daq peak in 2000. That mas­sive bub­ble col­lapsed in 1989. Traders keep get­ting caught in numer­ous Nikkei ral­lies that failed, de­spite the prior peak oc­cur­ring 30 years ago. (The Nikkei is still in a long-term trad­ing range).

It takes a com­bi­na­tion of in­vestor psy­chol­ogy and the (tech­ni­cal) ex­haus­tion of sell­ers at that top of the range for new highs to be reached on a per­ma­nent ba­sis. Sec­u­lar bear mar­kets end when new bull mar­kets be­gin – the two do not over­lap.

3. Dat­ing the birth of the bull mar­kets to bear mar­ket lows cre­ates weird anom­alies. Con­sider a few ex­am­ples of prior bull mar­kets not dated from pre­vi­ous lows.

If you want to say that the most re­cent bull mar­ket be­gan dur­ing the 2009 lows, then you must also con­tend that the 1982-2000 bull mar­ket be­gan in 1974. This would be ab­surd, be­cause the rest of the 1970s decade was marked by re­ces­sions and sell­offs and not an im­prove­ment of earn­ings.

Other bull mar­kets have sim­i­lar anom­alies. Where do you date the bull mar­ket that topped in 1966? From 1954? 1946? 1932? How about the 1929 peak be­fore the Great De­pres­sion? Dat­ing bull mar­kets from bear mar­ket lows cre­ates con­fus­ing, use­less analy­ses.

This is not merely a mat­ter of per­snick­ety tech­ni­cal def­i­ni­tions. Defin­ing when bull or bear mar­kets be­gin and end can have a sig­nif­i­cant im­pact on in­vestor psy­chol­ogy. The think­ing seems to be that a 10-year bull mar­ket is old and more likely to end sooner than a 6-year-old one. Wrong: Age is ir­rel­e­vant. Bull mar­kets do not die of old age, they are killed by the sen­ti­ment of over-en­thu­si­as­tic traders or by the ac­tions of fear­ful cen­tral bankers.

So go ahead and raise a glass to March 9, the low point of the bear mar­ket that sprung from the fi­nan­cial cri­sis. But save some cham­pagne for March 28 – the real birth­day of the bull mar­ket’s be­gin­ning in 2013, when it eclipsed the pre-cri­sis highs of Oct. 9, 2007.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.