Stock Market Cycles, Part 1: Definitions

There have been a number of blog posts and SA articles recently discussing how to invest in bear markets, whether we are in a bear market, how long a bear market might last, and how past bear markets have run their course. There have been a number of different statements made about when we have had past bear markets, which ones were primary or secondary, and which ones were secular. 

In this series, I will try to make rigorous definitions of terms and then apply them to the market record of the past 100+ years.

This article will present definitions of market cycles: secondary cycles, primary cycles, secular cycles and super cycles. This last term, super cycle, has not been frequently mentioned in the many posts recently. The term cycle refers to contiguous pair of bear and bull markets. A cycle can be from one top to the next top, or one bottom to the next bottom. In this series we will follow cycles that are top i through bottom i to top i+1.

Before going further, it is important to note that understanding the history of market cycles does not provide a viable market timing tool. Understanding market cycles can aid strategic allocation decisions. However, a market top (or bottom) is not defined at least until the start of the next part of the cycle is confirmed. A rise in a market of a specified amount (start of the next cycle) is required to define the last market cyclical bottom. For example, a primary market bottom is not defined and confirmed until the market has risen at least 20%.

Secondary Cycles

These cycles contain market moves that are often termed “corrections”. A correction is a counter trend change of 10% or more but less than 20%. In other words, a rally of 10-19% in a bear market is called a correction or a secondary bull market. In the same vein, a decline of 10-19% in a bull market (a secondary bear market) is also called a correction. Sometimes an entire secondary cycle is comprised of a fall and rise that are both less than 20%. Sometimes there is only one move in the 10% - 19.9% range (a counter-trend move). The other half of the secondary cycle may be 20% or greater, in the trend direction. There can be (and often are) many secondary cycles within a primary bull or bear market.

Primary Cycles

A primary bull market is defined as an advance of 20% or more from the last primary bear market bottom. Once a bull market is underway, it is characterized by higher highs and higher lows, although there may be occasional lower highs and/or lower lows. The primary bull market does not end until there is a drop of 20% or more from the highest high which becomes the primary market top. This 20% or greater drop signals the start of a new primary bear market. The primary bear market bottom is not defined and confirmed until a high is achieved that is 20% or more above the bear market low point. Primary market moves consist of one or more secondary market legs.

Secular Cycles

A secular bull market starts from a secular market bottom and continues as long as there are higher highs for intervening primary cycles. Ignore failures that are less than 10% below the cycle high. A secular bear market starts from a secular market top and continues as long as there are lower lows for intervening primary cycles. Again, ignore failures of less than 10%. There must be more than one primary cycle within a secular cycle.

Super Cycles

A super cycle high occurs when a secular top is at an all-time high. Ignore secular market tops that are less than 10% below subsequent secular tops occurring before the next secular bottom. A super cycle high becomes a super cycle top when the market subsequently reaches the next secular cycle bottom. A super cycle bottom is the lowest secular cycle bottom before a new all-time high that qualifies as a new super cycle top.

Future Parts in This Series

Part 2:  Primary Bull Markets

Part 3:  Primary Bear Markets

Part 4:  Primary Cycles

Part 5:  Secular Cycles

Part 6:  Super Cycles

Part 7:  Secondary Market Moves

Part 8:  Secondary Bull Markets

Part 9:  Secondary Bear Markets

Part 10: Secondary Market Cycles