Stock Market Cycles, Part 2: Primary Bull Markets

See Part 1 here. 

We have selected the Dow Jones Industrial Average (DJIA) for analysis because data is available since before 1900. In the table below are shown all the primary bull markets of the past 107 plus years, based on closing prices (daily). All primary market tops and all primary bottoms are identified since 1900. There have been 32 primary bull markets and 33 primary bear markets in this time period. The bottom of the latest primary bear market has yet to be defined. Although it is possible that it has been reached, it can not be defined and confirmed until a closing daily high is reached that is at least 20% above the lowest low since the last primary top. This lowest low is then defined and confirmed as the bear market bottom. The lowest low in this primary bear market, as of the date of this article, is shown in the last line of Table 1 (Part 2), below

Some of the primary tops and bottoms qualify as secular tops and bottoms. These secular tops and bottoms are identified in Table 1 with bold italic blue entries.   Primary bear markets will be discussed in the next part of this series (Part 3). Entire primary cycles will be discussed in Part 4. The market top of 10/9/2007 has qualified as a primary top. It remains to be seen if it is a secular top or not.

Following Table 1, there is a statistical analysis of the 32 primary bull markets. We look at what can be said, meaningfully, about the average gain for a primary bull market, as well as the average length (average duration). We also look at what the relationship is between duration and total gain for the primary bull markets.

Table 1.  Primary Bull Markets (Part 1)

Table 1. Primary Bull Markets (Part 2)

It may be useful to analyze the sizes and durations of these primary market moves. For bull markets, the variation in both gains and durations is very large. An attempt to apply simple statistics runs into some difficulty as discussed below.

In Table 2, there are simple statistics results for primary bull market durations. When all 32 samples are analyzed, we see that the standard deviation (817 days) is larger than the average value (611 days).   This indicates that one must view the average with suspicion because it may represent more than one distinct normal distribution (or may contain no normal distributions at all). If we partition the 32 samples into six sub-groups, the resulting statistics are much more satisfying, with standard deviations much smaller than the average values. The two longest duration groups have very small populations (4 or fewer samples). Such small groups may not accurately represent larger populations. For that reason, the two very small long duration groups have been combined to make a sample size of 7. The spread in data for that data set (last row in Table 2) is much wider than for the other groups. Our definitions of quality of distribution “tightness” are shown in Table 3.

Table 2. Primary Bull Market Durations        

With the exception of the seven very long duration primary bull markets (duration > 900 days), the groups show quite “tight” distributions.

The distribution of different market durations in time shows some interesting relationships.

The seven longest lasting primary bull markets have been bunched together. After the first top of a very long lasting bull in 1929, there was an interval of approximately 17 years to the top of the next long duration primary bull in 1946. That was the first of three very long lasting primary bulls with tops between 1946 and 1966, a period of approximately 20 years. There is another interval of 21 years until the next long lasting primary bull top (in 1987), the first of the last three very long lasting primary bulls.

Table 3. Rating Distribution “Tightness”

Six of the seven shortest durations (<100 days) occurred during the Great Depression. The seventh occurred in the middle of the bear markets following the dot.com bust (2001). The next longest primary bull markets (100 – 200 days) follow the same pattern, with five out of six during the Great Depression and the sixth in 2002.

There are 12 intermediate lived primary bulls (200 – 900 days). Eleven of these occurred in two bunches, between 1901 and 1919 (six bulls) and from 1968 to 1990 (five bulls). In the intervening 50 years, from 1919 to 1968, there was only one intermediate length primary bull in 1937.   Distribution of primary bull market tops overtime are shown in Table 5. Part 1 of Table 5 shows the analysis grouped by durations.

In Table 4 are shown the statistics for returns of primary bull markets since 1900.

Table 4. Primary Bull Market Gains

Again there is a problem of a standard deviation larger than the average value when all 32 primary bull market gains are averaged. “Tighter” distributions are obtained if the gains are divided into the three groups shown in Table 4. The most dispersion is shown in the 9 samples with gain > 100%. Four of these were larger than 250%. The other five are closely grouped between 107% and 145%. The average of these five is 124% with a standard deviation of 15%. The average and standard deviation for the four largest are 368% and 92%, respectively. Although it might seem reasonable to split the nine largest gains into these two groups, they should be considered separately with great care because small sample sizes result. Small sample sizes may not properly represent larger populations. See Table 5 Part 2 for the analysis of distribution of primary bull markets over time grouped by overall gain.

Table 5. Primary Bull Market Occurrences Over Time (Based on Year of Top)

Part 1 – Analyzing by Duration

Table 5. Primary Bull Market Occurrences Over Time (Based on Year of Top)

Part 2 – Analyzing by Total Gain

Note that, although eight of the very small gain bull markets occurred during the Great Depression (counting the 7 in the 1930s plus the 1 in 1940), also during that time there were as many medium gain bulls (2) as in any other decade and more large gains than any other decade.

In the graph below we see that the relationship between duration and total gain can be represented by a straight line. Although there is some scatter of data from the line (R-squared = 0.7444, where the value 1 indicates no scatter and the value 0 indicates random data with no correlation to the line), the longer a primary bull market lasts, the larger the gain.

Some summary observations are:

1. The 32 primary bull markets since 1900 have averaged about 2 ½ years (611 days) duration.
2. If one eliminates the 10 short and very short bulls during the Great Depression, the average primary bull market has averaged a little more than 3 ½ years duration. However, there have been three exceptionally long primary bull markets, one lasting more than 9 years, a second almost 10 years and a third 15 years 8 months.
3. The 32 primary bull markets have returned an average gain of 100% (excluding dividends).
4. If one eliminates the much higher overall gains from the three exceptionally long primary bull markets, the average gain is reduced to 70%.
5. More than 1/3 (11 out of 32) primary bull markets occurred in the 1930s, only 9% of the time analyzed. A disproportionate number of primary bull markets happened during our most austere economic period. These bull markets occurred in all three gain categories. Half of the smaller gain bulls occurred during the 1930s (7 out of 14) and that decade also tied for top number of medium gains.  What may be surprising, there were even more very large gain bulls during the Great Depression than in any other decade. Not only could one lose a lot of money during the Great Depression, but there were also outstanding opportunities to make a lot of money.
6. The second largest number of primary bull markets occurred during the decade starting in 2000, which is not yet complete. The sample size is limited (only two decades), but one is tempted to suggest that hard times present more investment opportunity.
7. There were 79% (11 out of 14) of the short and very short duration primary bull markets occurring in the 11 year period (1930 – 1940). This comprises only 10% of the time covered. The average duration for these 11 bull markets was only 78 days, less than four months. In fact the two shortest were just over one month duration (23 days). Nimble investing is required to profit in such volatility.
8. The seven longest lasting primary bull markets consumed just over 53 years. These were great times to be a buy and hold investor. But this is only about half of the 107+ years. The other half of the time buy and hold investing was much less rewarding.