Phases & Cycles Market Outlook – November 10, 2021
With the global economy and markets roiled by the pandemic, predicting where stocks are headed is particularly challenging these days. Although there is a consensus that the market currently is somewhat over-bought, veteran and novice investors alike are uncertain as to what will come next.
To the faint of heart, it may well appear that we find ourselves in uncharted territory. Are we overdue for a ‘correction’ or even a ‘bear market’ – or will stock prices continue their lengthy upward trajectory?
Having toiled in the study of technical analysis (and its subdivision, behaviour analysis) for longer than I care to admit, I can attest that, by scrutinizing historical data, one can discern where things are most likely headed – and map out their investment strategy accordingly. More about that momentarily.
First an analogy: consider, that most sensible folk would not embark on a road trip without a map, or without having planned ahead in terms of anticipated driving distances and times, requisite rest and fuel stops, etcetera. For instance a drive from Toronto to Montreal via Highway 401 is a distance of some 540 km in ideal weather conditions and should take approximately five and a half hours. However, unforeseen events such as a flat tire or breakdown could impact the timetable, causing it to take longer than planned to reach the destination.
That same sort of precautionary approach should be applied to investing. Just as you would not set out on a road trip without a map and some sort of timetable in mind, you ought not to embark on an investment strategy without a clear indication of where you are headed and how long the journey is likely to take.
Fortunately, it is possible even in these crazy Covid times to chart a course that helps to navigate through the various market cycles by scrutinizing historic charts, graphs and data.
At the heart of this art is an understanding of the ‘secular bull’ and ‘secular bear’ markets which, together, typically bridge some 40 years. (See table on next page.) Bull markets (periods of rising prices) generally last 22-26 years, while bear markets (periods of falling prices) tend to be much shorter.
Recent Historic Bull and Bear Markets:
Bull - 1907 - 1929 (22 years)
Bear - 1929 - 1942
Bull - 1942 - 1966 (24 years)
Bear - 1966 - 1974
Bull - 1974 - 2000 (26 years)
Bear - 2000 - 2009
Bull - 2009 - ?
Each secular bull market subdivides into shorter market cycles; each of these consist of an up-phase (rise) and a down-phase, a relatively brief dip in stock prices, or simply a ‘pause’ or resting period, where volumes and prices plateau as investors choose to take a time out. Think of these pauses as being akin to pulling into a rest stop on Highway 401 for food or fuel during our imaginary Toronto-Montreal road trip. The key point here is that, we planned for such contingencies before heading out and while travelling on our quest.
Which brings us to our present circumstances: We are now 12 years into a secular bull market that began in late 2009. The first cycle that extended to 2011 lasted a mere two years, during which the S&P 500 (SPX) gained 103% and lost 21%. In other words, it has taken us only from Toronto to Oshawa. This first cycle is typically short; it follows the just recently ended bear market. Most investors still believe that the rise is simply a “recovery rally”, a pause, and the bear is still around and about to repeat its nastiness (the chart on the last page designates this as “depression”). To put it another way, the negative sentiment is still around and the typical quote on the Street (remembering the previous real bear-market rallies) is “they are not going to fool me again”!
The next cycle lasted 5 years to 2016 and brought us from Oshawa to Coburg. This was a recovery cycle, where the bullish sentiment slowly matured (“Hope and Relief”) and where all Indicators reached all-time highs during 2013. The SPX gained 98% and during the down-phase it declined 15%.
The next cycle (2016-2018) continued its bullish growth (+62.5%), but also had a negative ending as the SPX declined 20.2%. This cycle (“Optimism”; the trip from Coburg to Belleville) was driven by the newcomers. Investors, who were 15-18 during the first cycle in 2011 and never experienced a bear market, have now heard the wonders of the bullmarket, the chances available for making large profits, and have rushed in to take advantage of the opportunities. The 20.2% decline was the result of their overoptimism and created a sell-off that was sharp and most importantly, due to its size, a bear-trap. Mapreaders certainly would not have confused Belleville with Montreal!
The trip to the next destination (Kingston) was drastically interrupted by the Covid problems in early 2020. We referred to it in our publications as a “flash-crash” since technically it was not part of a cycle. It was a copy of the 1987 “crash” in action, direction and outcome, as the SPX lost about 35% both times. Although, in 2020 it took the SPX only five months to recover and hit an all-time high (opposed to two years in 1987), once the SPX recovered, it embarked on the same action both times, a move to higher and higher levels, which in the current time, brought the SPX 115% higher since March 2020 (“Excitement”). As Mark Twain said, “History doesn’t repeat itself, but it often rhymes”.
So here we are, not yet in Kingston (let alone Brockville, or Cornwall, or Montreal), but if we were to consult our virtual road map, we’d see that we are now some 12 years into a secular bull market – which, remember, history tells us is likely to last somewhere around a quarter of a century.
Indeed, the markets do appear to be somewhat overbought, but that’s not to say that they are about to collapse. Small corrections notwithstanding, what we are more likely to witness in coming months is our arrival to Kingston in early 2022 (“Thrill”) where we will stop for a quick bite in the form of a decline similar to 2018, before we get on the road again towards our final destination. It would not be a surprise if the non-map-readers will again confuse Kingston with Montreal, because they will not know that we must go through the last cycle (“Euphoria”) which has different symptoms, including many stock-splits, before the next bear market.
Our advice? Rest calm. Stay the course and enjoy the ride. It does pay to do your homework, which clearly indicates that history is on our side.
PAC-20-198; MKT-501; November 10, 2021
Ron Meisels
Phases & Cycles Inc., 4000 Boul. De Maisonneuve West, Suite 2010, Montreal, QC, H3Z 1J9
Tel.: (514) 393-3653. E-mail: RonMeisels@phases-cycles.com
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