(07/06/12) The Trend Is Not Your Friend

Stocks will remain stuck in a secular bear market until politicians come to grips with big budget deficits, says technical analyst Martin J. Pring of Pring.com.

Secular trends in stocks and the three reasons behind them. We are here with Martin Pring, who is going to explain how these secular trends have affected the markets, and how they will affect them in the future. Hi, Martin.

Hi. Nice to be here. The S&P made a high of 1,553 in March 2000, and currently it is down about 40% when adjusted for inflation from that number. That tells you the secular trend is a very big influence on stock prices.

What are the reasons behind these trends?

Well, I think there are three causes of secular trends. First of all, we have a structural thing.

When we go through a normal business cycle, we can adjust inventories very quickly and so forth, and it is over in a couple of quarters. But in the secular trend, we have structural problems where the key industries overbuild over decades, and it takes a while to unwind that. And this is often compounded by government mistakes. So that is the first reason.

The second is psychological, where people move from a mood of extreme optimism to extreme pessimism. This takes about 15 to 20 years to alternate between the secular bull and the secular bear.

And the third reason is what I call unstable commodity prices. Typically, that’s when commodity prices rise too much and too quickly, or alternatively, which sometimes could happen, they move down too sharply. When commodity prices are moving up gently or falling gently, that is very good for the stock market. So these are the three causes of the secondary trends as I see it.

And within that picture, where are we now in that secular trend? Are we moving down the trend? Are we still...there’s the negative sentiment and everything, because I can see, when you talk about overbuilding, I look at the financials and, quite literally, overbuilding in housing. But have we gotten through that negative phase, or are we still kind of on the way down before we head back up again?

Well, we’ve gotten through the first one, I think. That’s the tech bubble—overbuilding in technology. I think we’ve gotten through the overbuilding in housing fairly well.

But we’re now getting to the point where a lot of these things are being compounded by policy errors, and the most obvious policy area is the budget deficit that we’re seeing and the inability to rein that in. Because mathematically, at some point, interest rates will go back up, and we’re going to be in a really serious problem.

Now, is this also affected by exogenous factors—say ,the governmental issues that are going on in Europe, for example?

Yeah, absolutely; absolutely. That can also feed in. Usually in a secular trend, things that shouldn’t go wrong do go wrong. In a recession, things that should go wrong do go wrong. Make the distinction there.