Is the Next Leg Down in the Secular Bear Market Already Underway?
Pring Turner Capital Group
By Martin J. Pring
September 12, 2011
http://www.advisorperspectives.com/...com/ad/ck/10096-119549-20828-1?mpt=936c4bdf1c
It has been our view since the opening years of the decade that US equities are in a secular bear market. That opinion was based on several long-term indicators reaching the kind of extremes seen at previous secular peaks. Examples would include readings in the Shiller P/E ratio in excess of 22.5, the Tobin Q above 1.07 and the dividend yield below 3%. Since recent readings of 20.25,1.05 and 2.25% respectively have been closer to those seen at secular peaks than the 7.5,.3 and 6.5% normally seen at secular lows we are holding fast to the conclusion that the secular bear has further to run.
Given the 15% decline since the April peak in the DJIA though, it is not unreasonable to ask the question of whether the next down leg in the secular bear is already underway? There is no certitude in the forecasting business but the correct answer is probably yes!
How does the 2009-2011 rally stack up to its predecessors?
Let’s start off with some simple statistics comparing the average business cycle associated bull market with the current one. We’ll call them “bull dog rallies”. The average duration of all bull dogs since 1903 is 33.8-months. Taking March 2009 as the low and April 2011 as the high, that translates to 26-months (26.75 on a Friday close basis to be precise). Let’s say we hit a new high in October. That would bring the duration close to 32-months, not far from the norm. The average bull dog magnitude was 45% and the best, between 1932 and 1937 was 78%. This compares to the difference between the April 2011 high in the Dow of 12,810 and the April 2009 low of 6626, which was 95%. We can parse the numbers some more by excluding the “big three” rallies of 1932-37, 1942-46 and 2002-2007. This would be justified under the principle of alternation, which states that the market rarely experiences identical characteristics back to back. In other words the 2009-?? bull market is unlikely match the big three in the duration category. By excluding them the average bull dog shrinks to 26.8-months. Remember the March 2009-April 2001 advance was 26.75-months! We are not expecting precision here but an October, or beyond, high would place this rally well into the upper echelon of the non-big three duration hall of fame. Remember, in magnitude terms it’s already a record.
Finally, if the current secular bear follows the path of the average of the three previous ones a turn to the downside would fit in on a very timely basis (Chart 1), even though it would be several months late.
Comparing Secular Bear Markets
Chart 1
The Response of Equities to Changes in the Money Supply
A useful approach that identifies how cyclical movements conform with secular trends is to compare real equity prices with the ratio between the S&P and money supply (M2). The concept is based on the idea that an expansion in the growth rate of M2 eventually has a stimulatory effect on the economy and vice versa. Investors in equities discount future business activity of course, but it is not until the ratio rallies that they are actually responding to the stimulatory effects of an expansionary monetary policy. This series certainly reflects the secular trends of the last hundred years.
Inflation Adjusted Equities and two Indicators
Chart 2
The red dashed line in Chart 2 is a ninety six month (8-year) moving average of the ratio. A useful exercise is to observe when it crosses above or below its moving average as that typically confirms that a new secular trend is underway, even better if it intersects with a trendline.
Currently the ratio is well below the its 2000-2011 down trendline and the MA, so it continues to signal a secular bear.
Note also that the red arrows point up when the 24-month ROC of the ratio reverses direction from above the 50%. A cyclical bear market typically follows. This series recently triggered another sell signal.
What are the technical indicators saying?
The bottom panel of Chart 3 shows the relationship between the S&P Composite and its 12-month MA. In this instance the S&P has been plotted as a monthly average as opposed to an end of month close. The dashed red line tells us when it is below the average by a factor of -5%. In every instance since the 1950’s a penetration greater than 5% has accurately identified a primary bear market. That does not mean that the crossover cannot be followed by a worthwhile rally. Indeed in1957 experience the Index rallied back above the MA, but the overall period was still a bear market. Also, the 1987 bear market was a 3-month affair.
S&P Composite and a Price Oscillator
Chart 3
The vertical lines in Chart 4 flag cyclical peaks in the S&P Composite. If you look to the left you will see that they are consistently preceded by a top in the AMEX Brokers Index. The same is true, but more so, for the broker relative strength line in the bottom panel. You can see that between 1990 and 2006 a bullish trendline break in the relative action supported a good general market. However, since 2007 this relative line has been falling to the extent that it is now decisively below its 1992–2011 up trendline. This suggests that brokers will underperform for many years to come and since they discount the market just like the S&P does for the economy this is a very negative structural sign.
Conclusion
Current readings for virtually every benchmark that signals a secular bear market low indicate that we have a lot further to go. By the same token several primary trend indicators that have proved reliable in the last 50-100-years are signaling that a new bear market is underway.
S&P versus the Amex Brokers Index and its Relative Action
Chart 4
Before it is over a serious challenge of the March 2009 bottom is likely. Intermediate readings suggest a counter-cyclical rally is likely. Unfortunately, history shows that they are notoriously difficult to play. Best to focus on the fact that we are in a secular bear market that has much further to run and a new down leg is likely underway. If you are looking for a leading indicator go no further than the Athens General SE Index. It recently fell to a multi-decade low.
(c) Pring Turner Capital Group
www.pringturner.com
