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Erik McCurdy
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Erik is the senior market technician for Prometheus Market Insight and has been performing chart analysis since 1995. The software program that he developed to monitor long-term stock market trends has correctly identified 92% of the cyclical turning points in the S&P 500 index since 1940.... More
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  • Stock Market Secular Trend Review 2 comments
    Aug 4, 2013 4:09 PM | about stocks: SPY, DIA, QQQ

    As we note often, context plays a vital role in the development of reliable market forecasts. Short-term price behavior only has meaning when analyzed in the proper context afforded by the long-term view, so all investing and trading strategies should begin with a thorough understanding of the current secular environment. There have been five secular trends in the stock market since the crash in 1929, three downtrends and two uptrends.

    (click to enlarge)

    The current secular bear market began in 2000 following a speculative run-up during the second half of the 1990s. As usual, market behavior clearly signaled that a secular inflection point was approaching and ourSecular Trend Score (NYSEMKT:STS), which analyzes a large basket of fundamental, internal, technical and sentiment data, issued a long-term sell signal in December 1999. At the time, our computer models predicted that stocks would enter a secular bear market that would last from 10 to 20 years. Following the topping process in 2000, a prototypical secular downtrend began that continues today.

    (click to enlarge)

    Severe secular bear markets such as this one are nearly always accompanied by extremely weak economic activity and the first decade of this century was characterized by the lowest real GDP growth since the Great Depression.

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    Stock market secular trends typically last from 10 to 20 years, depending upon the nature of underlying structural economic trends. Since we are currently in the final stage of a debt expansion cycle that began 60 years ago, it is highly likely that the current secular bear market is still several years away from its terminal phase.

    (click to enlarge)

    The STS supports the hypothesis that this secular downtrend is far from over as the score has yet to return to positive territory following the sell signal in 1999. Secular inflection points develop slowly, usually over the course of 6 to 12 months, so the STS will provide plenty of advance warning when the next true investment opportunity develops in the stock market.

    (click to enlarge)

    Secular trends are themselves composed of cyclical subcomponents, and the current cyclical uptrend began in March 2009. When they occur during secular bear markets, cyclical rallies have an average duration of 33 months. At a current duration of 53 months, the bull market from 2009 is long overdue for termination and it will likely be followed by a violent overbought correction.

    (click to enlarge)

    The final phase of the previous cyclical bull market from 2002 was easy to identify as it developed in 2007. The measured move higher from 2004 until 2006 was followed by speculative blow-off rally that terminated the advance in prototypical fashion. The historic amount of Federal Reserve stimulus introduced during the last four years, targeted directly at risk assets such as stocks, has created massive market distortions, causing the current cyclical bull to be characterized by violent moves in both directions. However, the last advance off of the low in 2011 is rising at an unsustainable rate, suggesting that the rally has entered its final phase.

    (click to enlarge)

    Another way to model an unsustainable advance is via a log periodic bubble. This mathematical formula replicates market behavior extremely well during highly speculative uptrends and the following chart displays the high degree to which the current stock market rally is exhibiting the characteristics of a prototypical bubble.

    (click to enlarge)

    Additionally, it is important to remember that stock market investment risk continues to hold near the highest level ever recorded. Anything can happen over short-term time periods, but the key to having consistent success over the long run as an investor and a trader is to stay aligned with the most likely scenarios and protect yourself from the unlikely ones. There will come a time when the risk/reward profile of stocks is once again favorable and the judicious study of market data will signal when that next long opportunity develops, just as it did in March 2009. However, now is a time for extreme caution and we remain fully defensive from an investment perspective.

    We will identify the key developments as they occur in our daily market forecasts and signal notifications available to subscribers. Try our service for free.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: Market Outlook Stocks: SPY, DIA, QQQ
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Comments (2)
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  • AllStreets
    , contributor
    Comments (1201) | Send Message
     
    Very nice review of the secular status. Since you have piqued our interest in your secular indicator which has remained on a sell for fourteen years, can you give a brief rundown on the major components of that indicator. Have you also got a cyclical indicator that said buy in 2003, sell in 2007 and buy in 2009? If so what does it say now? In my comments on SA several days ago I said the McClellan oscillator and summation index indicated a short term rally and that weekly bars also had room to run for a while based on stochastics.

     

    I also say sell the next time the NYSE summation index has a negative slope and the McClellan oscillator hits +50 or higher (its currently turning up from a little below zero). I see a chance that could occur in late August or early September since the oscillator recently completed a three week drop and will likely take about three to six weeks from a low to return to overbought.
    4 Aug 2013, 07:09 PM Reply Like
  • rebowley
    , contributor
    Comments (223) | Send Message
     
    AllStreets Nice reply! My point of view is that money is awash in the system primarily to fight deflation. I don't see the political will to reign in Govnt spending and for the next four or five weeks congress in on recess. I fully expect volatility to spike up and over all volume to decline. In light of that, money is looking for a home, in fact any home.
    Those "safe" investments are few and far between however they still exist at this time. The problem I have with your modeling is that you are looking at the past and trying to predict the future. Yes caution is wise as it is always wise to be cautious. We(collectively) have never been here before in light of the FEDS actions and as they remain in tact I shall remain bullish, long equities, short 20+long bonds, short vix. Timing is everything!
    4 Aug 2013, 09:05 PM Reply Like
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