A Secular Bull Market Arises From the 2009 Shadows

by Serge Berger | March 10, 2014 12:13 pm

Respect the bear, but never fear it. That’s a lesson every investor should take away from the panic of 2009, and it’s applicable everywhere — even now, as we sit around all-time highs.

I remember the scene as if it was yesterday: It was Sept. 15, 2008, and investment banking giant Lehman Bros. had just filed for Chapter 11 bankruptcy protection. The S&P 500 fell more than 4.5% on the day, and as I left the office around 6pm after a busy trading day in Manhattan, the streets were quiet — much too quiet for New York City.

On any other day, a sea of yellow cabs greeted me right outside my building in mid-town Manhattan, but not on Sept. 15. I found myself walking a few blocks north just to find a cab. It was eerie. With the financial epicenter of the globe being shaken to the core that day, the fear in the air was palpable.

The market eventually would take the market through a shaky autumn and winter. In fact, it wouldn’t be until six months later, while headlines of doom and gloom were still flying faster than ever, that the market began to climb out of the abyss. On March 6, 2009, the S&P 500 finally capitulated to the ironic intraday level of 666, then on March 9, the market hit its closing low point at 676.53. A day later, stocks saw a big follow-through buying day, with the index rallying more than 6%.

As it usually goes, neither the media nor the investing crowd took the March 10 bounce as anything more than a short-lived lift, and those smart enough to buy kept very quiet. But to me, it became clearer that considering the typical six-month lag in which the market works, coupled with the still-paralyzed investing public, at least a medium-term bottom was in place.

I wasn’t smart/dumb enough to go all-in on stocks that day either, but because the psychological picture seemed to match up with what I saw on the charts, I knew better not to be caught short the market at the time.

I was right.

Of Bulls and Bears

The general story in terms of bull and bear markets, particularly in the S&P 500, is that roughly every 13- to 17-year bull market is followed by a 10- to 15-year bear. (The Great Depression, depending on when you’re measuring from, stands out as an exception.)

So, looking at the below chart of the S&P 500, which spans all the way back to 1927, this rhythm should somewhat stand out. After a flat tape the bear market from the mid-’60s through the early ’80s, the S&P 500 began its great bull run. Aside from the crash on Oct. 19, 1987, the bull market really kept running until the dot-com bubble of the late ’90s and early aughts popped. This then led to the “lost decade” and the easy monetary policy introduced by then-Federal Reserve chief Alan Greenspan, during which stocks wildly gyrated and ultimately bottomed five years ago … in March 2009.

Click to Enlarge

Looking at the past 20 or so years of trading in the S&P 500 a little more closely, what stands out on the below weekly chart is that the March 2009 capitulation marginally and classically broke below the index’s 2002 lows. This helped to wash out all those players who placed their stop-loss orders around this area, and paved the path for the steep and vicious rally we have witnessed since.

The nail in the coffin for the bears came in spring 2013, when the S&P 500 broke to fresh all-time highs, leaving behind the market tops from 2000 and 2007.

40 year SPX chart
Click to Enlarge

This has, in my opinion, given birth to a new secular bull market — the long 13- to 17-year type of cycle that I discussed above.

However, with the cyclical bull market now five years of age, it is slowly but surely getting somewhat long in the tooth. While many sectors and industries/groups of stocks still look good on the long side, it is somewhat too early to clear the portfolio and or lean short this market. But if history is any guide, then at some point over the next three to nine months, a first cyclical bear market will throw investors a curveball.

The thing to remember when all turns to panic (which it inevitably will) is that if we do indeed find ourselves in a new secular bull market, then the next cyclical bear should lead to a correction no bigger than roughly 30%.

That would mean the major breakout that the S&P 500 staged in spring 2013 when it broke past long-term highs around 1,550 could easily get retested at some point.

And if it does, just remember — the market always bounces back.

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