The Bull is Too Young to Die!

[Michael J. Sykes]

I encountered a novel technical argument claiming the bull market will resume after this correction.  You can read the article by Adam Hamilton here:  http://www.zealllc.com/2010/spxlives.htm

He argues:  1)  the rally from the March low easily qualifies as a cyclical bull market rather than just a bounce, 2) In modern history, cyclical bull markets (even within secular bears) have always lasted at least two years.  3)  Therefore, the bull must live!

I do not find this argument particularly compelling, but would be interested in others' view.  I am curious whether it is factually true.  At what point does a "bounce" become a "bull market"?  Were there any cyclical bull markets during the depression era which lasted less than two years?

It seems to me that the percentage gain of our recent bull market may compensate for its youth.  Live fast, die young!

[Steven Vincent]

Great post Michael. Yes, had seen that piece and my reaction is similar to yours. You see a lot of this kind of analysis where past patterns are used to justify current expectations. Usually it is done to justify the bearish crash expectations by comparing the current market to the Dow in 1929-1934. In either case it represents, in my view, faulty "analysis". It also seems to be a cousin to cycles analysis and both members of the family serve to affix a set of expectations in the mind of the trader based on a predictive certainty of a future outcome.

Mr. Hamilton falls within the camp of a group of analysts who declared a Bull Market in March of 2009 and are now intellectually, emotionally and reputationaly invested more in their prediction than they are in the market itself. There is NEVER any discussion of the circumstances under which they will change their position or admit that market conditions have changed. Such pundits are RIGHT and they will prove it come what may.

This is why I strive to not predict the future but rather identify, understand and act upon the present. Once of the most common mistakes we make as traders is to paint ourselves into a corner and tie our own hands with our intellectual gynmnastics. Trading is not an intellectual pursuit (though intelligence is helpful). It is a practical, money making pursuit.

If I am wrong I want to know ASAP and take appropriate action even sooner. WE NEVER "KNOW" WHAT THE MARKET IS GOING TO DO. There are relative periods of confidence in market direction and relative periods when market direction is unclear. The trader needs to know the difference between the two. One of the most powerful things a trader can say is I DO NOT KNOW. At that point the trader can then do nothing or go to cash and wait for opportunity to present itself clearly.

I read all the blog sites primarily to ascertain sentiment among traders and readers. Right now I am seeing that there is bearish overconfidence which perhaps needs to be unwound by a big rally.

Frankly Mr. Hamilton may very well be right that we are in a bull market and this recent decline represents a buying opp. But charts from the past won't help you know that and you can't KNOW that. You can only assess it as a relative probability.

[Michael J. Sykes]

Given that we have experienced a cyclical bull market, it seems to me that Mr. Hamilton's declaration in March of 2009 has already been proven correct.

If his claim that cyclical bull markets have always lasted more than two years is true, it does not mean that this bull market will last at least two years. However, it would influence my perception of the relative probabilities.

It would first be necessary to specific objective criteria for identifying "bull markets" that do not include a minimum duration requirement. For example, we could define a bull market as any period of time during which price increases by 40% or more without an intervening correction of 20% or more. Then we could examine the past price action of major stock indices to see whether price is always higher two years after the beginning of a "bull market."

I did not get the sense that Mr. Hamilton systematically researched his claim. If he defines a "bull market" as a period of two years or more during which price increases, his claim would obviously be worthless.

[Bruce Matthews]

Hi Michael,

I don't have data for the DJ going back to the early 1930's but we have a good surrogate in the deflationary collapse of the Nikkei 225 in Japan which started in 1989 - 90 and is still ongoing in my opinion.

Maybe comparison to the Nikkei during this period is more relevant than comparison to the DJ in the early 1930's because Japan's situation in 1990 is looking similar to our current situation in that Japan's situation was a deflationary collapse caused by massive and reckless debt accumulation and it occured more recently than the US example.

Anyway, an empirical study of the chart of the Nikkei 225 from 1989 onwards

http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=jp...

shows that in the subsequent 10 years after the initial collapse, there were three bull moves to the upside which lasted between 12 - 15 months each. All three of these moves can only be described as bear market bounces because each move was short lived and then quickly erased by the next wave down which was notably of much longer duration.

The bull move in the Nikkei 225 which started in 2003 and lasted for just over 4 years CAN be described as a cyclical bull market within a secular bear market, but that did not commence until 13 YEARS after the initial decline started.

Going back to the US markets. Given that the bull move off the March 2009 lows seems to have topped out after just 14 months, it is in my opinion very likely to have been nothing more than a liquidity induced bear market bounce that will quickly be erased starting in the fall of 2010 and onwards into 2011.

Given that it took the Nikkei 13 years to produce a cyclical bull market within the secular bear which commenced in 1989/90 I conclude that it is highly unlikely that the US markets entered a cyclical bull market back in March 2009 just 16 months after the 2007 highs.

Mr Hamiltons analysis does indeed show a degree of ignorance to the study of past secular bear markets.


Bruce (London)

[Steven Vincent]

Thanks to you guys for the great discussion. I would say that regardless of whether or not Mr. Hamilton's analysis correlates with past market performance, there is relatively little value in looking for today's answers in the past. "Past performance is no guarantee of future returns". It says so on the box if you read the label.

Looking to the past in this way may help to confirm (or give caution to) current analysis. But if it is too heavily relied upon it becomes a crutch used to support a broken position.

[Henry Thompson]

While similarities can be drawn between the Nikkei and S&P in terms of expecting long-term decline, Japan and the USA are not the same socially or economically. Reserve currency, manufacturing base, military expenditure, overseas debt, demographics, health care costs, population density, etc. all contribute to different outcomes. Nevertheless, the basic fact does remain the same, no matter where you are; you cannot spend more than you earn for ever.

[Michael J. Sykes]

Thanks for your response and pardon my late reply. I believe the Nikkei comparison is valid. I view that chart as providing evidence that conflicts with Mr. Hamilton's theory. If we define a bull market as a rally of at least X% without an intervening correction of Y% or more, then I believe a couple of those "bounces" would qualify as bull markets for most reasonable values of X and Y. For example, the rally that began in '99 appears to have brought the index up around 58% without a large intervening correction. Claiming that it was a bounce because of what subsequently happened to the index is problematic IMO. For the purpose of evaluating Mr. Hamilton's theory, we should not define bull markets based on their length or what happens after the trend reverses.