History Will Repeat Itself

10/27/2009 12:00 pm EST

Focus: MARKETS

Lawrence McMillan

Founder and President, McMillan Analysis Corporation

Larry McMillan, president of McMillan Analysis and editor of The Option Strategist, says previous severe bear markets took many years to end, and so will this one.

We have three previous time periods in which a severe bear market shook the financial system. These then gave way to strong rallies, fueled by the liquidity thrown into the system to stem the bear market.

However, once those rallies ran their course, reality set in and prices drifted, grinding their way lower for three or four years. Finally, another rally took place, and the highs of the “liquidity rally” were finally exceeded, but six or seven years passed in the interim.

This general description fits the 1907-1917, 1937-1945, and 1973-1982 markets. I contend that, when the history is finally written, it will also characterize the 2007-2015(?) market as well.

There is a certain amount of economic foundation to this action. The government pumps money into the “system,” and it finds its way to Wall Street in order to leverage speculation for quick profits. As the stock market rallies, it appears to many observers that it is predicting a grandiose up swing in the economy.

As it turns out, though, the speculative fervor generated by easy money only makes stock prices go higher; it does not fix the economic woes. Once the economic data refuse to improve, the market realizes that it has overshot on the up side and another, slower, bear market unfolds.

The rally into 1907 wasn’t exceeded decisively until 1924—17 years later. The strong post-Depression and post-World War II bull market that ended in 1966 wasn’t decisively exceeded until 1982—16 years later. The Great Depression bear market took longer: The highs of 1929 weren’t exceeded until 1954, 25 years later.

Assuming the roaring tech bull market of the 1990s was the feverish rally of our day, it topped in 2000. So, we’re looking at 2016 or so before a decisive up side breakout takes place. Since this is only 2009, that leaves quite a bit of time before nirvana returns.

Some traders have noted that when the Dow Jones Industrial Average hits round numbers for the first time, it takes a long time before another decisive up side move takes place. This [also] lines up with some of the periods we’ve already discussed.

The Dow first hit 100 in 1906; it wasn’t until 1925 that the next big bull market got under way. [It] first hit 1000 in 1966; it wasn’t until 1982 that the 1000 level was left behind, 16 years later. The Dow first hit 10,000 in 1999. Based on the time it took to leave 100 and 1000 behind, we’re looking at 16 to 19 years—2015 to 2018—before 10,000 is left behind for good. Then we can start thinking about Dow 100,000!

These are probably all ways of saying the same thing: It takes a long time to work
off the excesses of a wild bull market. Once this current rally ends–be it in one month or six–that will likely represent the top of the market for six or seven years to come.

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