Don't Rule Out More Upside In 2014

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Includes: BXDB, BXUB, BXUC, EPS, IVV, RSP, RWL, SDS, SFLA, SH, SPXU, SPY, SSO, TRND, UPRO, VOO
by: Mike Little

2013 has been like the "running of the bulls"

I like to compare the 2013 US market to the "running of the bulls". The market bulls have been running through the streets all year, only occasionally having to lower their horns to toss a moderate pullback out of the way. Threats of the Fed halting its stimulus program, a credit crunch in China, and a government shutdown have been no match for the bull stampede.

Year to Date numbers

Here are some rough estimates of year to date US market index returns:

US Small Caps (NYSEARCA:IWM) +35%, US Large Caps (NYSEARCA:SPY) +27.5%, US Mid Caps (NYSEARCA:MDY) +29%, Nasdaq Composite +35%

Can the "running of the bulls" continue in 2014?

The bulls have to take a rest at some point. At least for a little while, right?

If I use the S&P 500 crossing above the 200 day moving average as the begin date of this rally, the bulls have been running for about 13 months. Will the run continue for several more months without taking a breather? Has this happened in the past? If so, how long did the rally last and what was the market performance from month 13 on?

I didn't have the answers; I've studied the market a great deal, but never focused specifically on the duration of market rallies. So I decided to take a closer look.

Analysis parameters

This analysis was kept very simple. The goal was to take a look at what has occurred in the past from a high level, as a starting point for further research. Here are the parameters used for the analysis:

  • A market rally begin date is anytime the market price moves above the 200 day simple moving average after trading below it.
  • A significant market pullback or correction is defined as a time when the price of an index drops below its 200 day simple moving average after it has been above it for more than a month. This also defines the end of a market rally.
  • The US S&P 500 was chosen as the primary index, using historical data dated back to 1950.

Sources

Unemployment figures obtained from US Bureau of Labor Statistics.

Market data and charts obtained from Yahoo! Finance.

The findings

Market rallies with durations longer than 13 months are listed below. The list is ranked by duration of rally, not return. Since our current rally is at month 13, I also listed the percentage gain or loss from month 13 until the end of the rally.

#1) November 1962 through June 1965

Duration: approximately 30 months without a significant pullback, if you discard the single day anomaly, November 22nd 1963, when the market traded down to the 200 day moving average as a result of the US President Kennedy assassination.

Return: approximately 41%

Month 13 through end of rally return: approximately 14.7%

Fundamental story: Period of economic expansion. Unemployment was on the decline from about 6% down to 4%. Market was rebounding from a 1961-1962 corrective period.

S&P 500 - 1963-1965Click to enlarge

#2) November 1953 through May 1956

Duration: approximately 29 months without a significant pullback.

Return: approximately 80%

Month 13 through end of rally return: approximately 25%

Fundamental story: Renewed investor confidence after market finally recouped the losses from the great depression by breaking above the peak reached 25 years earlier in 1929. Recovery period from a recession where unemployment had reached 6% in 1954 and then declined throughout the market rally down to 3.9%.

US S&P November 1953 through August 1956Click to enlarge

#3) August 1996 through August 1998

Duration: approximately 24 months without a significant pullback. Must exclude a single day anomaly related to a currency crisis in Asia on October 28, 1997.

Return: approximately 60%

Month 13 through end of rally return: approximately 13%

Fundamental story: Internet and technology innovation continuing to fuel growth. Unemployment level ranged from 4.4%-5.6%.

S&P 500 - 1996-1998Click to enlarge

#4) December 1994 through July 1996

Duration: approximately 18 months without a significant pullback.

Return: approximately 38%

Month 13 through end of rally return: approximately 2.4%

Fundamental story: Tech sector was fueling growth with the internet about to take off. Unemployment rate below 6%.

S&P 500 - 1994-1996Click to enlarge

#5) October 1992 through March 1994

Duration: approximately 17 months without a significant pullback.

Return: approximately 11%

Month 13 through end of rally return: approximately -2%

Fundamental story: Extension of rebound from 1991 recession low.

S&P 500 - 1992-1994Click to enlarge

#6) April 1958 through September 1959

Duration: approximately 16 months without a significant pullback.

Return: approximately 32%

Month 13 through end of rally return: approximately -1.5%

Fundamental story: Rebound from 1957-1958 worldwide recession.

S&P 500 - 1958-1959Click to enlarge

#7) August 1982 through December 1983

Duration: approximately 15 months without a significant pullback.

Return: approximately 42%

Month 13 through end of rally return: approximately -2.5%

Fundamental story: Market price broke out from a 15 year period of stagflation that had kept the market range bound. Also, the 1981-1982 recession ended, the market was rebounding from that price correction. Changes to the tax system took place.

S&P 500 - 1982-1983Click to enlarge

#8) May 2003 through July 2004

Duration: approximately 15 months without a significant pullback.

Return: approximately 25%

Month 13 through end of rally return: approximately -2.5%

Fundamental story: Market rebound from 2.5 year bear market period. Unemployment rate ranged from 5.4-6.3%. Interest rates enter a declining period.

S&P 500 - 2002-2004Click to enlarge

Conclusion

I was able to answer some of my questions from taking a look at historical data.

Question: Has there been a rally with a duration longer than the current rally?

Answer: Yes, there were 8 market rallies between 1950 and today, a 63 year period, that lasted longer than the current 13 month rally in the S&P 500.

Questions: How long did those rallies last, what was the return, and what was the return after month 13?

Answers:

Period Duration Return Return post month 13
1962-65 30 months 41% 14.7%
1953-56 29 months 80% 25%
1996-98 24 months 60% 13%
1994-96 18 months 38% 2.4%
1992-94 17 months 11% -2%
1958-59 16 months 42% -1.5%
1982-83 15 months 32% -2.5%
2003-2004 15 months 25% -2.5%
Click to enlarge

Notes

  • 3 of the 8 rallies lasted 2 years or more. These also were the only rallies that saw a significant return between month 13 and the rally end date.
  • 4 of the 8 rallies saw negative returns between month 13 and the rally end date.
  • Some of these rallies were rebounds from an economic down cycle, but not all, so that is not a consistent theme.

Quick look at where we are today

From the chart below of the S&P 500, we see we are in month 13 of the current rally when using November of 2012 as the start month when the price crossed above the 200 day moving average. The current return since November is roughly 31%.

S&P 500 - 2012-2013Click to enlarge

One common theme between now and 1982 or 1954 is the fact that the S&P 500 broke above a previous multi year peak, an event that creates positive investor sentiment. Beyond that, I have not been able to find any concrete similarities.

How I am using this information

I found this information mainly educational and it once again drove home the fact that the market is not predictable. I now know we've had runs longer than the current one and I will not rule out more upside in 2014. I will not complain if we see a repeat of 1955 in 2014. I also saw that in some cases the market continued to rally but ultimately, at a later date, dropped back below the price it was trading in month 13 of the rally, so that cannot be ruled out either. My plan is to stay invested using my trend following rules and let the market price direction be my guide. When the trend changes to the downside, I'll step aside to the safety of cash.

Disclosure: I am long IJH, MDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information in this communication is for informational purposes only. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment. Information contained herein was derived from sources believed to be reliable. However, no guarantees can be made concerning the completeness or accuracy of said information.