All Cyclical Bull Markets are Not Created Equal

| March 23, 2011

Today, a prominent mainstream analyst proclaimed that the cyclical bull market from 2009 is only halfway through its four to five year run. His forecast is based on the historical average duration of cyclical uptrends. However, the prediction is fundamentally flawed because it completely ignores secular context. Cyclical bull markets that occur within secular bear markets behave very differently from their counterparts in secular bulls. The chart below displays the S&P 500 index during the past several secular market cycles.

In order to calculate an accurate average duration for cyclical uptrends, you must distinguish between secular bull and bear market environments; otherwise, the analysis lacks proper context. By our measures, there have been 16 cyclical bull markets since the market crash in 1929, including the current one from March 2009. Eight of those cyclical uptrends have occurred during secular bull markets and 8 have occurred during secular bear markets, including the current one. The average duration of a cyclical bull market within a secular bull market is about 50 months, or 4.2 years. However, the average duration of a cyclical bull market within a secular bear market is only 33 months, or 2.8 years. At a current duration of 24 months, the cyclical uptrend from early 2009 is only 9 months younger than the average. Additionally, the three shortest cyclical bulls within secular bears had durations of 13, 23 and 24 months, so the current cyclical uptrend would have plenty of company even if it were to terminate right now.

The moral of the story is beware analysts bearing forecast gifts. Never take wildly bullish or wildly bearish predictions at face value. Before affording even the smallest measure of trust to a given source, take the time to develop an understanding of the underlying methodology and review its historical accuracy. Also, look for a pattern of bias that could negatively affect forecasting performance. Many market experts are either perpetually bullish or perpetually bearish. The most reliable predictions come from analysts who objectively analyze market data without favoring a given outcome and recognize that multiple outcomes are always possible. As always, self-reliance is the key to long-term success as both a trader and investor, and the less you rely on market prognosticators like us, the better off you will be.

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Category: Articles, Commentary, Market Update

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