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Monday, September 28, 2009

Bob Brinker and David Korn Agree: Cyclical Bull-Secular Bear Market

Posted September 28, 2009...Bob Brinker and David Korn don't always agree on their outlooks for the stock market, but at this time, they seem to be in sync. David has written an outstanding treatise of the current market as it compares to previous secular bear markets.

David Korn wrote the following analysis of the stock market in his September 26-27, 2009 newsletter -- hot off the press and posted with David's permission:


As I am sure all of you all know by now, I am of the opinion that we are currently in a cyclical bull market, within the context of a longer-term or "secular" bear market.

The last secular (long-term) bear market occurred over a 16-1/2 year period of time which lasted from 1966 all the way through August of 1982. During this secular trend, there were four mini-bull markets, or "cyclical" bull markets as many like to refer to them which were of a shorter duration.

I wanted to review with subscribers the first bull market of the 1929-1949 secular bear market. It provides some interesting insight into how the stock market behaved 80 years ago and reveals that investor behavior hasn't changed much at all during that time.

SECULAR BEAR MARKET (September 1929 - June 1949)


Let me take you back in time for a few minutes to set the stage for this analysis. If you like, pretend your are Christopher Reeve, pick up a penny and transport yourself Somewhere in Time.

Its the roaring 20s. And they don't call it "roaring" for nothing. Stocks were the place to be, and borrowing was plentiful. For every dollar you invested, you could borrow $9 worth of stock on margin. And trust me, people were not afraid of using margin back then. Who would be? From August 24, 1921, through September 3, 1929, the Dow rose from 63.90 to 381.19 in a glorious secular bull market producing gains of 497%!

Consider how much press there was when the Dow hit 10,000 a few years back. Now, picture how it must have been when the Dow topped 100 in 1922, doubled that and broke through 200 in 1927 and then just a year later hit the 300 level on December 31, 1928. Talk about a Happy New Year!

"Stocks have reached what looks like a permanently high plateau."

- Irving Fisher, Professor of Economics, Yale University, October 17, 1929

That's a fishy quote from Fisher eh? On September 3, 1929, the day after Labor Day, the Dow hit its pre-crash closing high of 381.17. Are you sitting down? It wouldn't reach that mark again for almost 25 years!

Its hard to believe, but in just over two months, many investors saw their entire portfolio cut in half. Can you imagine that? You have probably heard about "Black Thursday" October 24, 1929, when panic selling took place amongst a frenzy on Wall Street. Indeed, eleven well known speculators had committed suicide before Richard Whitney, then vice-president of the NYSE stepped in, and announced that he was buying stock. This helped alleviate the fear and stop the bleeding.

"The worst has passed."

- Joint statement by representatives of 35 of the largest wire houses on Wall Street at the close of trading, October 24, 1929

"We feel fundamentally Wall Street is sound, and that for people who can afford to pay for them outright, good stocks are cheap at these prices."

- Goodbody and Company, market letter to customers, quoted in the New YorkTimes on October 25, 1929

The following two days, Friday and Saturday (the market was open back then on Saturdays), saw steady sessions with investor confidence being restored. However, investors' hopes were dashed the following week when the market suffered a record one-day loss of about 13% on Black Monday, October 28, 1929, and another 12% loss on Black Tuesday, October 29, 1929.

(You would think market historians could come up with a more creative color scheme to name the days -- perhaps Charcoal Monday or Slate Tuesday, for example).

About two weeks later, the market bottomed (although not its ultimate bottom for this secular bear market). On November 13, 1929, the Dow closed at 198.69 -- a decline of 47.9% in just over two months! Coincidentally, in our most recent bear market, if you look at the S&P 500, it declined about 47% from its peak in March 2000, to its closing low in March 2003. The percentage decline was pretty much the same as in 1929, but the time frame over which it happened, is far different. In 1929, if you had lost half of your net worth in just over two months, the last thing you would be thinking about would be investing in stocks again. If that had been the case, you would have missed a relatively short, yet very profitable cyclical bull market run.

With that introduction, let's take a look at...

CYCLICAL BULL MARKET NUMBER 1 (November 13, 1929-April 17, 1930)

Date: Dow Jones Price (All based on closing numbers)

11/13/1929: 198.69
11/21/1929: 248.49

As the foregoing numbers show, the Dow began the first cyclical bull market of the 1929-1949 secular bear market at a price level of 198.69. Hard to imagine now that the Dow is in the 10,000s. Anyhow, the Dow began its bull journey with a hefty 25% gain in just six trading days. Holy smokes! Talk about volatility. That must have been a relief for many investors.

11/26/1929: 235.35

With gains like 25% in just over a week, you should expect a pullback and that is exactly what happened. From November 21, to November 26, 1929, the Dow made its first correction, pulling back to 235.35 - a decline of 5.29%.

12/09/1929: 262.20

A couple of weeks later, the market had recovered all of its correction declines, and broken through its prior high to close at 262.20 on December 9th. This marked an 11.4% move off of the correction low, and now the Dow was up 31.9% from the bear market lows.

12/20/1929: 230.89

Just 11 days later, the Dow "tested" its previous correction level. This "second correction" as I call it, marked the low that this cyclical bull would fall to. This was an 11.95% correction off of the high.

1/30/1930: 263.28
2/13/1930: 272.27

After correcting the second time to 230.89, the Dow rose slowly but steadily. It took about seven weeks before the Dow hit a new closing high for this cyclical bull market on January 20, 1930. The Dow continued rising with no significant pull back until closing at 272.27 on February 13, 1930. The Dow was now up 37% from its lows.

2/24/1930: 262.47

On February 24th, the Dow corrected 3.6% from its cyclical bull market high. This was an important inflection point for this bull market, because it marked the last correction of any significance which for purposes of my analysis, is a correction over 3.0%.

Ok, stick with me for a moment here before you look at the last set of numbers. This cyclical bull market peaked almost two months later on April 17, 2004, when the Dow closed at 294.07. Once the Dow broke into the 290s, you can see how the market churned before it topped on April 17th. You will see that number in the data below, but I want you to notice how the market spent a lot of days right around that level.

4/7/1930: 290.19
4/8/1930: 288.36
4/9/1930: 291.15
4/10/1930: 292.19
4/11/1930: 292.65
4/14/1930: 293.18
4/15/1930: 293.26
4/16/1930: 292.20
4/17/1930: 294.07 * *Cyclical bull market closing high
4/21/1930: 288.23
4/22/1930: 290.01 * *Last day Dow was in the 290s

As you can see, the Dow stayed within about 6 points from its closing high for about 2 weeks in April. One interesting thing that you can't see from the closing numbers, is that on an intra-day basis, the Dow rose above 293 on seven of those trading days. In my opinion, this is an important point from the "technical analysis" perspective, as it shows that the sellers always came in by the end of the day to prevent it from closing above 294. A sign of distribution, and a flag that the end may have arrived.

All in all, the Dow gained 48.00% during this cyclical bull market which lasted only about five months. Kind of similar to the action we saw since the March lows. The question is whether this bull market is going to have more legs. I personally think it will.


Studying past bull markets, can give you the ability to gain a perspective on how the market moves. Too often, we are unable to see the forest through the trees; or, we follow so closely, that we only see the trees without being conscious of the forest. What can we discern from this analysis? Well, first of all we can learn the obvious. Even in a cyclical bull market, the market doesn't move in a straight line, and there can be several significant pull backs. On the other hand, the largest pull back was only on the magnitude of 11.95%. This fits within the pattern that I observed in the cyclical bull markets during the 1966-1982 secular bear market. Certainly, there can be merit in waiting for buying opportunities, but as you can see, the moves up can be ferocious at times. Moreover, there really were not many "buying opportunities" during this cyclical bull market, so if you are going to try and lump sum in, you better hope you don't miss it.

David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service. Copyright David Korn, L.L.C. 2009

Honey here: You can request a free issue of David Korn's weekly newsletter. David co-edits the Retirement Advisor. You can download a free issue here [LINK]

I wrote: "Dixiegeezer took this picture of a wind-surfer this morning." Now it looks like I have insulted some people. I promise it was not intentional.... LOL!

Kirk said: "
PLEASE change the title of the picture as it is a MAJOR insult to windsurfers... Kiteboarding is easy to learn compared to windsurfing. A friend of mine has a bumper sticker on her van that tells her kiteboarding husband: "if windsurfing was easy, it would be called kiteboarding!""


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