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Thursday, February 7, 2013

New secular bull market, not likely

I have seen lots of talk in the media about a new secular bull market.  I can say that there is absolutely no evidence that the current secular bear has ended.

In What causes secular bull and bear markets? I showed how the age demographics indicate we have another 10 years of this secular bear to go.

In ADX indicator I showed how the monthly chart with ADX shows transitions into and out of secular bear markets.  Lets see what the monthly chart is saying now.

I have circled the ADX on the rallies in green and red on the declines.  We can see that the current ADX is lower then it was at SPX 1500 in 2007, which was lower then in 2000.  The surge in ADX into the 2002 low was a sign that we had transitioned into a secular bear market.  The current rally is so weak that it definitely is not signaling the start of a new secular bull market.  The ADX has worked well through several secular bull and bear market cycles.  I think it would be foolish to think it is different this time.  The reality is this uptrend is weaker then the last two.  It might even mean a crash here could be bigger then the last one.  To transition into a secular bull, we need to see a nice rise in the ADX on a rally and a drop in the ADX on the subsequent sell off.  We are clearly not there yet.

We are constantly bombarded in the media about how cheap the market is.  However, that is absolutely not true.  At some point in past secular bear market, stocks have been very, very cheap.  Lets look at some metrics.

First up is market capitalization vs GDP.


I have circled the start of the last two secular bull markets.  Clearly they started from much lower valuations then we have now.  We are still higher then in any non bubble period.  The market certainly is not cheap relative to the economy.  One could argue that globalization has affected this valuation and that could be true.  However, it is still hard to argue stocks are cheap on this metric.

This is another way to value the market, the Q ratio.


If you are not familiar with this method you might want to read the article.  This chart is fairly similar to the other one.  Although the market is not as expensive as it was in 2000, it is clearly not cheap like it was at the start of the last two secular bull markets (circled areas).

Lets look at the P/E ratio charts.  There are two common methods for viewing that.

This first chart is the trailing 12 months earnings version.

I circled the valuation levels at the start of the last two secular bull markets.  People tout the market as cheap based on this chart pretty often.  Does this look cheap to you?  About the best you can say is that it is fair value.  That is much different then being cheap though.

This one is based on 10 year average of earnings.

That chart is very much like the GDP and Q ratio charts above.  It shows the market still very over valued.  In the last secular bear market both P/E valuation charts had a value under 10 before it was over.  We have not even approached that level yet.

On the sentiment piece, during both of the last two secular bear markets a lot of people swore of stocks forever (this is why stocks get cheap).  Do we really have that environment today?  When Bill Gross wrote his piece on the death of equities everybody jumped on the contrarian bandwagon.  That must be a sign they said.  They compared it to the famous Newsweek cover from 1979.  I have yet to read a piece that actually said he might be right.  That famous 1979 cover was believed by the majority and was not called a contrarian sign at the time.  It was only years later that people looked back on that as a sign, LOL.  Something cannot be a contrarian sign unless the majority actually believe in it.  That is clearly not the case today.

We don't have really cheap stocks yet.  The ADX indicator is not giving any sign of a new secular bull market either.  People are definitely not swearing off stocks yet.  If we are starting a new secular bull market from the current conditions it will be a case of "it is different this time".  We know from past history that very rarely is it really different this time.


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