Acampora: Cyclical and Secular

08/08/2003 12:00 am EST


Ralph Acampora

Director of Technical Studies, New York Institute of Finance

Few figures on Wall Street are as respected and popular as Ralph Acampora, technical director for Prudential Financial. He is widely known for taking highly complex financial data and presenting it in an unhedged, clear and concise manner. Here, he discusses "secular" versus "cyclical" and the current position of the market.

"So much is being written these days about a cyclical bull move within a secular bear market that we question whether readers truly understand the difference between secular and cyclical. For us, a secular market move is one that can be measured in decades, and a cyclical market event lasts several months to a couple of years. Looking back into modern market history, we realize that our parents enjoyed an 18-year secular bull market, between 1948 and 1966. The Dow gained 400%. In hindsight, it was an exciting and very rewarding time for long-term investing. If mom and dad had had the ability to index the market, it would have been a very profitable strategy. A buy/hold philosophy would have also served them well despite a series of cyclical bear markets (1953, 1957, 1960, 1962, and 1965).

Cyclical Bears Within a Secular Bull. The five bear markets between 1948 and 1966 were severe and scary, but they ultimately reversed back into the major upward bias that preceded them. These nasty declines fulfilled the definition of cyclical bear markets within a secular bull market. Hence, healthy secular bull markets are expected to be interrupted by periods of declines (bear markets) that naturally unwind the excesses created during their reign.

A Secular Bull Market Ultimately Morphs Into a Secular Bear Market. History suggests that generational excesses have to be dealt with at some point in time—the 'good o’ days' do not last forever—and our parents were not exempt. They were subjected to 16 years of market swings that they had never experienced before. There were five breathtaking declines (1966, 1969-1970, 1973-1974, 1977-1978, and 1981-1982), which literally wiped out the fortunes made during the previous secular bull markets. Buying every dip simply doesn’t work in a secular bear market.

Cyclical Bulls Within a Secular Bear. Despite the staccato pace of this 16-year secular bear market, there were four fantastic advances (1966-1968, 1970-1973, 1974-1976, and 1980-1981). Thus, during a frustrating secular bear market it is common to witness months or even a few years of counter-trend rallies that capture extraordinary percentage gains.

History Repeats. There is a comic one liner that goes something like this: 'As I get older, it seems that my parents get smarter.' Well, it’s too bad that many of us didn’t pay more attention to those 'boring conversations' our parents had with their friends about the stock market. Had we done so, we would have realized early on that we could potentially experience an 18-year secular bull market (1982-2000), just like theirs, except that ours was up 633%. And who says that history doesn’t repeat? No wonder we (the current generation of investors) are so hung up on the buy/hold philosophy—we have been conditioned to think this way because of our successes during this 18-year bull run, despite three severe bear markets (1987, 1990, and 1998).

Cyclical Bears Within a Secular Bull. Speaking of those three bear markets—they still conjure up vivid and haunting memories . Nevertheless, they are still regarded as merely cyclical in nature. Thus, healthy long-term bull markets are expected to be interrupted by periods of declines (bear markets) that naturally unwind the excesses created during bull phases.

The Secular Bull Market of the 80s and 90s Morphed Into the Current Secular Bear Market. If one follows the path of history, then the fate of our fathers is now ours—we too must deal with a secular bear market—a time when our generational excesses, created during our secular bull market, are unwound. The good o’ days of the 1990s are over. Just as in our parents’ secular bear market, we also lost a generation of investors—and it will take many years to rebuild their confidence and trust. The question remains: is this secular bear market over? The quick answer: no, because not enough time has passed for us to say that we have totally unwound all the excesses of the previous 18-year secular bull market. Nor have we totally restored investor confidence. That’s the bad news. But now for the good news—these counter-trend rallies are expected to turn into exciting and rewarding cyclical bull markets. Don’t forget dad’s four cyclical bull markets that averaged 46.7%.

The Making of a Cyclical Bull Market in a Secular Bear Market. Technically, we believe the market has formed an inverse head-and-shoulder bottom that formed over the last 12 months. The lowest low was recorded in October. And, coincidentally, the bottom happened in 2002, bringing up another very important technical factor—it represents the fulfillment of the four-year cycle low theory. For example, the previous four-year cycle low was October 1998. We think it would be safe to say that the rise from the March 12 low is not a short-term bounce but rather the beginnings of a cyclical bull market much like the one our fathers enjoyed in the 1970s. Just like the 1970-1973 cyclical bull market, today’s cyclical bull, which officially began onOctober 10, 2002, could also extend 2¼ years and take the Dow Jones Industrial average to an all-time new high."

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