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Taking a Look: Longer-term Chart Comparisons

Several discussions have taken place recently where the future direction of the stock market was debated, within the context of where we have been over the past 20+ years (longer-term trend analysis). I am often asked, "So what happens after major bull markets?" Of course, the rhetorical expectation is to assume, "Well, some pretty major bear markets, that's what!" But this has not been proven to be the case. Continuing under the longstanding assumption that the history of the stock market has to-date been a fairy tale of one long (and only briefly interrupted) rising trend, most major secular bull markets have been followed by extended periods of consolidation, not declines. These periods are marked by sharp and jagged ranged trade (something we have speculated upon in this column over the course of the past year), and heightened volatility.

Below is a chart of the S&P 500 taken recently.

Obviously this has the look of a seriously disrupted uptrend. Nonetheless, while extreme damage has been done to the S&P 500 here (in a very short amount of time), examining the chart above demonstrates that in fact a choppy up & down range has been in place since 1997 (or 2000, depending on your point of reference). While the scale of the market looks distorted and horribly misshapen in this picture, given the context of the past few decades (not just one), this could be viewed within the scope of historical perspective as being quite common.

The most recent example is the Dow Jones from the 1968 - 1982 period (seen below), which I was surprised to note was discussed by an analyst on CNBC just today:

First glance would show the same sort of broken uptrend (marked by the "undercut low" of 1977-78), but over the next several years the range trade continued (see ensuing charts), and in fact the low of the late 70's planted footing for an ascending triangle pattern (a strong break-out pattern) that ultimately lead to the one of the greatest bull markets the world has ever known.

The analogy here is not to over-subscribe to any longer-term outlook based solely on the present, or immediate state of the markets. Should the above scenario unfold again (and to bet against it would be to bet against the longer-term prosperity of the United States, not to mention the global economy), the most prudent way to proceed as an investor would be to follow these basic principles: buy stocks when they are cheap (during the panic periods, at the bottom of the range), and sell them (or short them) when they are no longer cheap (when bullishness returns). Furthermore, given the markets went essentially nowhere for 15 years (using the '67-'82 example), investors were wise to park money in strong balance sheet-oriented, dividend-paying stocks, and favor cash over stocks as an asset class when there were no good stocks to buy (i.e. focusing on strict stock-by-stock analysis and purging portfolios of "mediocre" performers). If this sounds familiar, then you have been paying attention.