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Monday, October 8, 2012

What causes secular bull and bear markets?

In Secular bull vs bear market  I showed how to use ADX to tell us when the market was switching between secular bull and bear stages.  I figured that out over a decade ago, but at the time I had no idea what caused it.  Some years later I saw a chart in one of those trading flyers we used to get a lot of in the mail about how they can make you rich.  Most of them are totally useless of course, but this one chart made a lot of sense.  When I wrote the article on secular bull and bear markets I did not look on the internet to see if I could find a similar chart.  I saw a chart in a recent article and it prompted me to search for a better one.  I believe this chart explains exactly why it happens.


Lets compare that to the DOW over the same time period.

I circled the areas where the age ratio from the above chart peaked and bottomed in the past.  If you think about what is happening it makes logical sense.  People in the 40-49 age bracket are in their peak earnings years and have kids growing up and get serious about saving for retirement.  Part of that is putting money into the stock market.  People in the 60-69 age bracket are retiring.  They tend to take money out of the stock market and put it into lower risk investments.  Secular bull markets are caused by inflows bigger then outflows.  Secular bears have outflows bigger then inflows.  I believe it really is that simple.

The age ratio chart shows the money flows do not turn positive until 2022-23.  The P/E ratio part of that chart is no where near the normal trough area.  I know there are a lot of market pundits out there expecting new highs and beyond in the indexes in the coming years.  I think they will be sorely disappointed.  Stocks are going to get a lot cheaper then they are now.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.