Standard bull markets typically have a shelf life of less than four years

This Bull Market Is Hard to Pin Down
By PAUL J. LIM
Published: March 24, 2012

HISTORY says that standard bull markets typically have a shelf life of less than four years. So when the bull that sprang to life in March 2009 turned 3 this month, it understandably raised some concerns.

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Chris Goodney/Bloomberg News

Depending on how you mark the calendar, Wall Street’s recent surge could be just a late charge in a bull market ready to run its course. Or it could be the start of something bigger for stock investors.

Yet some strategists on Wall Street mark the calendar differently. They contend that the bull market that began in 2009 actually ended last year, when the Standard & Poor’s 500-stock index hit a rough patch from late April to early October.

During that stretch, the S.& P. 500 lost 19.4 percent from peak to trough based on daily closing prices — just shy of the 20 percent threshold for a bear market. On Oct. 3, though, the index actually fell through that barrier for a brief moment during the trading day.

If that was indeed a bear, the thinking goes, then a new bull market must have been born on Oct. 3. And that would imply not only that stocks have more room to run, but also that sectors like technology, which are sensitive to shifts in the economic cycle, are likely to do well. Despite a slight downturn last week, they have been buoyant for months.

“From an official standpoint, in terms of what Standard & Poor’s will count this as, the bull market is entering its fourth year because the market didn’t officially decline by 20 percent based on closing values,” says Sam Stovall, chief equity strategist for S.& P. Capital IQ. “However, if someone asks, ‘What do you think will happen in terms of performance?’ I think the market will act as if we’re in the first year of a new bull.”

At the moment, it is. Historically, the first years of major rallies provide investors with the biggest boost, with the S.& P. 500 having posted gains of 38 percent, on average, in Year 1 of past bull markets since World War II. True to form, the rally that began on Oct. 3 has already pushed the index 27 percent higher in less than six months.

That surge isn’t the only evidence supporting the view that Wall Street is in a new bull market. Normally, shares of small companies — considered higher-risk but higher-returning assets than blue-chip stocks — tend to outperform the broad market at the start of a new rally. Shares of large, industry-leading companies, by contrast, usually catch fire only after bull markets mature.

Sure enough, small-company stocks have been performing even better than the S.& P. 500 over the last six months. For instance, the Nasdaq composite index, made up of younger and faster-growing companies than are found in the S.& P. 500, is already up more than 31 percent since Oct. 3, while the Russell 2000 index of small stocks has gained 36 percent.

At the same time, economically sensitive sectors like technology and consumer discretionary stocks have been outpacing the broad market since October, which is also typical of the first years of bull markets, Mr. Stovall notes.

He added that if this were the fourth year of an aging bull, defensive areas of the market — like health care, consumer staples and utilities stocks — would be leading the charge. Yet they haven’t been.

Jason Hsu, chief investment officer for the investment consulting firm Research Affiliates, says that even if investors are not convinced that this is the start of a new bull, market psychology is likely to keep pushing the markets higher for now.

“Research on short-term momentum in asset prices says that if you had a strong six months of steady asset appreciation, that tends to drive further price appreciation,” he said.

He added that many investors “did not participate in the fairly speculative, risk-asset rally that began in October.” So, given the occasional herd mentality on Wall Street, these investors could simply be waiting for an opening to jump in. As a result, Mr. Hsu says he thinks that the broad market could keep rallying in the short run, and that there could be continuing demand for riskier, economically sensitive stocks, especially on market dips, he said.

TO be sure, there are different types of bull markets — so-called cyclical bulls that tend to run alongside a single economic expansion, as well as so-called secular bull markets that may last for more than a decade, often containing shorter bull and bear cycles within them. The stock market’s epic run from 1982 to 1999, for instance, was the last big example of a secular bull.

“I don’t think we’ve begun a new secular bull,” says Mark D. Luschini, chief investment strategist at Janney Montgomery Scott. He points out that historically, secular bulls tend to start at price-to-earnings ratios in the single digits, as was the case in 1982. But based on valuations using 10-year average profits, the market’s P/E ratio is above 20.

Doug Ramsey, chief investment officer at the Leuthold Group, also says that while this may be a new bull market, it is what he calls a “noneconomic” rally.

In other words, this bull market — unlike the one that began in March 2009 — emerged after a bear market that did not coincide with an official recession.

What’s the significance of that? “Recessions are what clear the decks for a longer-lasting recovery and drive valuations down to truly low levels from which bigger gains can spring,” he said.

Mr. Ramsey’s research on noneconomic bull markets since World War II found that these rallies tend to be shorter-lived — the average one lasted just 31 months. And they tend to be more muted. While the typical noneconomic bull market returned less than 62 percent, cumulatively, the median bull market that emerged after recessions gained nearly 102 percent.

Of course, given that stocks have gained 27 percent so far in their current rally, that would still leave the market some ample room for gains.

Paul J. Lim is a senior editor at Money magazine.
http://www.nytimes.com/2012/03/25/your-money/bull-market-may-have-much-further-to-go.html?ref=your-money

3 Stages of a Bull Market and 3 Stages of a Bear Market

2011 Value Investing Congress Notes
http://www.scribd.com/doc/54958483/2011-Value-Investing-Congress-Notes

The swing of the pendulum 
o Constantly going between greed and fear, risk tolerance and risk aversion, and optimism and pessimism
o In theory, the pendulum should be at the happy medium

 On average it is in the middle 
 But it spends little time there
 Excesses constitute the errors of herd behavior

 3 stages of a bull market 
 Few people feel things are getting better
 Most people realize improvement is taking place
 Everyone thinks things will get better forever
 "What the wise man does in the beginning, the fool does in the end."
o The last buyer pays the price 

 3 stages of a bear market 
 Few people realize that things are overpriced and dangerous
 Most people see the decline is underway
 Everyone believes that things will get worse forever
o Great opportunity to buy if we can behave counter-cyclically - Importance of being a contrarian.



Ben Claremon: The Inoculated Investor http://inoculatedinvestor.blogspot.com/  

The Investor and Market Fluctuations: The Single Most Important Paragraph in Graham's entire book for the Bear Markets (5)

Let us return to our comparison between the holder of marketable shares and the man with an interest in a private business.  We have said that the former has the option of considering himself merely

• as the part owner of the various businesses he has invested in, or 
• as the holder of shares which are salable at any time he wishes at their quoted market price.

But note this important fact:
The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more.* Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.†



* “Only to the extent that it suits his book” means “only to the extent that the price is favorable enough to justify selling the stock.” In traditional brokerage lingo, the “book” is an investor’s ledger of holdings and trades.

† This may well be the single most important paragraph in Graham’s entire book. In these 113 words Graham sums up his lifetime of experience. You cannot read these words too often; they are like Kryptonite for bear markets.  If you keep them close at hand and let them guide you throughout your investing life, you will survive whatever the markets throw at you.






Incidentally, a widespread situation of this kind actually existed during the dark depression days of 1931–1933.  There was then a psychological advantage in owning business interests that had no quoted market. 

• For example, people who owned first mortgages on real estate that continued to pay interest were able to tell themselves that their investments had kept their full value, there being no market quotations to indicate otherwise. 
• On the other hand, many listed corporation bonds of even better quality and greater underlying strength suffered severe shrinkages in their market quotations, thus making their owners believe they were growing distinctly poorer. 

In reality the owners were better off with the listed securities, despite the low prices of these.

• For if they had wanted to, or were compelled to, they could at least have sold the issues—possibly to exchange them for even better bargains. 
• Or they could just as logically have ignored the market’s action as temporary and basically meaningless. 

But it is self-deception to tell yourself that you have suffered no shrinkage in value  merely because your securities have no quoted market at all.

Returning to our A. & P. shareholder in 1938, we assert that as long as he held on to his shares he suffered no loss in their price decline, beyond what his own judgment may have told him was occasioned by a shrinkage in their underlying or intrinsic value. 

• If no such shrinkage had occurred, he had a right to expect that in due course the market quotation would return to the 1937 level or better—as in fact it did the following year. 
• In this respect his position was at least as good as if he had owned an interest in a private business with no quoted market for its shares. 
• For in that case, too, he might or might not have been justified in mentally lopping off part of the cost of his holdings because of the impact of the 1938 recession—depending on what had happened to his company.

Ref:  Intelligent Investor by Benjamin Graham