Bull Market? Bear Market? Historical Charts Say Maybe One of Each

Are stocks in a bull market that has a long way to go or a bear market that has a long way to go? How about both? As with Middle East politics, the validity of your point of view about the stock market can hinge on when you choose to begin history.

A recent post by John Lounsbury, a North Carolina financial planner, on the Seeking Alpha website uses sets of charts to compare the current market with significant periods of market history to try to tease out recurring patterns that could offer a clue to what's coming next.

Bulls have made their case by comparing the rally since March 2009 with rebounds from the lows of other major bear markets. Lounsbury's post highlights a chart from chartoftheday.com showing moves in the Dow Jones industrial average in the 1,000 trading days after the bottoms in 1932 and 1942 and the 2002 Nasdaq low.

Those rallies, ranging from about 90 percent to 250 percent, easily exceed the gains this time around, suggesting a lot more to come.

Bears differ, of course, and could offer as evidence a chart from dshort.com comparing market action after several of the greatest tops of the last century: in the Dow in 1929, the Nasdaq in 2000 and the Nikkei 225 in Japan in 1989. That chart, similar to one Lounsbury uses to illustrate the same point, suggests that stocks have further to fall.

The antithetical outlooks shouldn't come as a surprise. Market trends run for longer than investors anticipate, and their length and strength tends to be equivalent and opposite to what came before, like Newton's Third Law of Motion applied to finance. If you start the clock after a huge, protracted decline, chances are the next move will be up for a similarly extended period, and vice versa.

If that tends to be forgotten, it's because investors have become accustomed to thinking only for the short haul, a byproduct of 24-hour financial news outlets that parse events to the Nth degree. Such hyped-up saturation coverage leads them to think that every development means something and that each moment could be a significant turning point.

The lesson from the charts and Lounsbury's post is that historical patterns can be useful, but only as one component of market analysis. Without the context provided by key pieces of current information, a snapshot of the past may only show investors what they expect to see, not what they need to see.

Taken together, these charts suggest that this is not the worst time for someone with a very long-term outlook to gradually feed money into stocks. But they also indicate that they won't miss out on a great opportunity, either, if they're patient and prudent and wait to see what the next few squiggles look like.