One More Trap Ahead for Investors

03/09/2010 12:00 pm EST

Focus: MARKETS

Kelley Wright

Managing Editor, Investment Quality Trends

Kelley Wright, managing editor of Investment Quality Trends, says one more leg down is likely before this secular bear market ends.

In the investment world, the word secular is an adjective used to describe a long-term time frame, usually at least ten years. A secular market then is a market cycle where the primary trend has either an upside or downside bias for a significant period of time.

Within a secular market there can be cyclical or counter-trend corrections. By example, the last secular bull market began in 1982 and ended in 2000. In 1987 there was a cyclical or counter-trend correction, but the primary trend to the up side remained in place until 2000.

In the year 2000, the technology and dot-com bust ushered in the first secular bear market since the one that began in 1966 and ended in December 1974. In October/November 2002, the market reversed until late 2007 in a cyclical or counter-trend rally that eclipsed the market high established in 2000.

Many investors believed this rally was actually a new secular bull market. Many investors believed the same thing in 1973, when a similar cyclical or counter-trend rally eclipsed the market highs of 1966 and 1969. What investors learned, however, was the primary trend was still down and remained in place until the final bear market low and bottom in 1974.

In March 2009 the primary trend, a secular bear market, was confirmed when new cycle lows were established in the major indexes. Since the March 2009 lows, the markets have been in a cyclical or counter-trend correction of the primary trend. If the pattern established in previous secular bear markets [of] a succession of three legs down before the primary trend is exhausted and a new secular cycle begins, then at minimum a test of the March 2009 lows should be anticipated.

From the onset of the leg down that began in 2007 to the March 2009 lows was approximately 17 months. [That same number of] months from the March 2009 lows takes us into the third quarter of 2010—close to the traditional selling season in the markets; September/October. The market has an amazing ability to move in symmetry.

The cyclical counter-trend will continue, and the market indexes will challenge the January highs and attempt to establish new highs by the late third quarter. When the counter-trend tops out, the dollar will weaken; interest rates will drop; energy, metals, and commodities will sell off; the euro will rally, and foreign stocks and multinationals will lead.

When this secular bear market is finally, totally, exhausted—I suspect some time in late 2012—it will be the best opportunity since 1975 to back up the truck. In the interim, we will have to pick our spots with high-quality stocks that represent historic good values in sectors where the products and services are in demand regardless of what is happening in the global economy and markets. 

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