How long can this keep going on?

The 1970’s group ACE wrote a hit song from which I borrowed today’s title. Here’s a video of that song, which may bring back a few memories.

Below is a chart of the Dow Industrials since 1900. We’re looking at 117+ years of data on this chart – certainly representative of the greater portion of stock market history in the USA. I wanted to take a look at how long bull markets can remain in place before a corrective period. The answer is kind of fuzzy, to tell you the truth.

 

Corrective markets

To start with—I’ll identify the corrective periods for the Dow, which were:

  • the sideways volatile market of 1906-1924
  • the bear market of 1929-1932
  • the sideways volatile market of 1937 – 1949 (one could argue that there was a higher high in 1946—but it was pretty weak – real strength didn’t show until 1950+)
  • the sideways volatile market of 1965 – 1983
  • the sideways volatile market of 2001 – 2012 (one could argue that 2007 was a higher high, but it was flat for the broader S&P500 index, thus I ignore the high on the Dow)

 

 

Bull markets

After identifying the corrective or sideways markets, we can identify the bull markets, and note approximately how long they lasted. We can also make a notation as to whether the bull market was “orderly” or “parabolic”. I’ll define “orderly” as more or less traveling on a 45 degree trendline (yes, it all depends on the scale of the chart—but humor me here – today’s chart doesn’t stretch time out to illustrate the proper proportions). I’ll also define “orderly” as having the odd corrections of 5-10% or greater along the trendline, while making higher highs and higher lows.

Parabolic markets illustrate no such corrections.  They move off of the 45 degree trendline in almost a parabola shape. BTW—if you are interested in trendline angles, study the works of WD Gann. While not everything he wrote was of value, certainly his methods for matching time and price to correctly draw trend lines is worthy of understanding.

Below I’ve identified the Dow’s bull markets. I’ve notated their duration, and their relative pattern (orderly or parabolic)—and then noted what happened after each bull market ended (tying into the corrective periods – refer to the chart above).

 

  • The bull market of 1924 – 1929 (5 years). Completely parabolic. Big bear market for 3 years followed by a rally from 1932 – 1937 then the sideways period of 1937 – 1949. Conclusion: big parabolic rise led to big swings for many years to come
  • Then, along came the orderly bull market of 1950 – 1964 (14 years). Higher highs and lows in a rationally patterned bull market. Led into the sideways markets of 1965 – 1983. Despite relatively large swings in that period, no big crashes. Conclusion: the orderly bull market that proceeded the sideways market did not create enough excess to inspire outright market crashes.
  • After the 1965-1983 sideways market came the greatest bull of all time. The bull of 1982 – 2001 (19 years) saw the market rise more than 11-fold from 1000 to over 11,000. That bull was orderly from 1982 to about 1998. From 1999 to its peak (tech bubble) the market became parabolic. Despite the volatility of the 2001- 2012 sideways period that followed, it was not similar to the 1965 – 1983 sideways period. This new sideways period contained two true bear market crashes***.  Markets crashed in 2001 and in 2008. Conclusion: the parabolic movement during the last 2 years of that bull market led us into high volatility/ bear market crashes.
  • Finally, the current bull market emerged in 2013 (5 years so far). Recall that a bull market is not in place until a new high is in place. The first 3 + years of the current bull have been orderly (not notated on chart for lack of space). Since the second half of 2016, the market has moved parabolicly.

 

As we can see by the parabolic market of the late 1920’s, and the parabolic market of the late 1990’s, parabolic moves can last at least a couple of years. But, as seen on today’s chart, and noted in this blog  – they invariably correct.

 

***I wrote an article in Canadian MoneySaver in 2001 predicting that markets would trade sideways for at least a decade. Sometimes I get it right.

 

Next blog: “Ask me anything” questions answered

I’ve received a couple of interesting requests for a blog topic, so I will answer them in the next blog.

8 Comments

  • Good Morning Keith,

    First thing, great choice of music. It bring a lot of memories. Do still holding cash and what percent?

    Thanks,

    Paul

    Reply
    • Hi Paul–we are now at just under 15% cash. We bought a couple of positions recently–and have a shopping list strictly based on individual security prices–nothing gets bought until a price is hit. So I shall let the market, and the movements of the individual stocks, dictate if and when the cash gets spent.

      Reply
  • What are your thoughts on Twitter from a technical perspective. I believe I am observing a cup and handle formation but I would like your perspective on this. I saw a similar formation for Chevron several months ago and it proved to be correct.

    Thank you in advance.
    Carmine

    Reply
    • Carmine–just as a reminder, I don’t normally do individual stock analysis requests on this blog (I will do comments on sectors, markets, commodities and indices– I will also discuss stocks referenced in a blog).
      Having said that–I can make a bit of an exception here because i have been looking at the same thing re TWTR.
      The chart looks pretty interesting, and it could be a big mover. I’d prefer to see it hold over $23 which is closer to the neckline breakout point. Its below that now. We are watching to see if the stock will go over it. Plus, Craig is doing some research on the company from a fundamental point of viewpoint. If the chart continues to show progress, and if the fundamentals are good in Craigs very conservative way at looking at things, we might take a position.
      We don’t hold it at this time and cant say for sure we will, but its interesting…

      Reply
      • Keith,

        Thank you for making an exception and answering my question. I actually thought I was posting for your “ask anything segment”….oops:)

        Carmine

        Reply
        • FYI–turns out that despite the chart, Craig doesn’t like the stock. He says the single digit projected revenue growth with negative current earnings suggest less potential for big upside. Yes, one positive is that the short sellers are off of the trade. So it might move up technically a bit, but not so much on its business model. We wont be buying TWTR.

          Reply

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