This Bear Market Still Has Claws

Last Updated Jun 8, 2009 10:15 AM EDT

I respect that Bruce McCain is relying on Ned Davis's research to identify past bear and bull markets and his conclusion from their data that the market may have already bottomed. However, I disagree with their theory that 1939 was the end of a secular bear market that began in 1929. I also do not believe that the market has hit its ultimate bottom in this current secular bear market, regardless of whether it started in 2000, as Bruce believes, or 2007, as I do. In my view, this bear will last until at least 2015.

The 1929-1949 secular bear market for the Dow had four cyclical bear phases and three cyclical bull phases. The cyclical bull phases were extremely strong, but each one was followed by cyclical bear phases, all of which dragged the Dow through an extended sideways trading range. In fact, the Dow did not actually surpass the equity level set prior to the 1929 crash until November 1954, which was 25 years later.

As a result, Bruce's argument that the bear market was over in 1939 does not compute for me. The fifth phase, a cyclical bear, of that secular bear began in December, 1938 and did not end until April, 1945, more than six years after it began. During that period the Dow declined by 38 percent. Similarly, I expect that the current market will retest its lows at least several times before the current secular bear market concludes, and that it is likely to make a new low sometime in 2010.

Major declines ahead
Secular bear markets take a long to time to evolve. Because this current secular bear is the most vicious one since 1929, the probability is high that the market indices or the average stock will decline by at least 75 percent when compared to their all-time highs. The recent action in the Nasdaq after the dot-com bubble lends support to my opinion. After peaking in 2000, it declined by 79 percent to the lows of this decade.

Bruce says the current market still has room to run. I respectfully disagree. Between its peak in 1929 and its trough in 1932, the Dow had six different powerful rallies that were followed by lower lows, and the same thing could be happening now. Back then, the first and most powerful rally took the Dow from its trough of 198.69 to a peak of 297.25 on April 17, 1930. This powerful rally of almost 50 percent seems very similar to me to the recent rally we've experienced. But the 1929-1949 secular bear had five more such futile rallies before the Dow hit its low point of 41.22 in the summer of 1932. This represented almost a 90 percent decline from its peak of 379.11 in 1929. There is no reason to believe that this secular bear will behave differently.

Where to put your money now
I do not disagree with Bruce on the point that investors can make a lot of money in a secular bear market. In fact, from the experiences I had during the 1966-1982 secular bear, I much prefer investing during a secular bear instead of a secular bull. Why? Because it's much easier to make money by buying and holding stocks, since there will be many quality stocks that will have declined by 50 percent to 90 percent.

Since I believe that the current bear market rally is unsustainable, I suggest that investors maintain a high percentage of cash in their portfolios. But it's important to note that investors can afford to be patient and defensive during a secular bear market, since it can take years for the shares of many companies to bottom. During the 1966-1982 secular bear market, for example, Boeing's shares bottomed in 1974 and Black and Decker's shares bottomed in 1981. This is why it pays to be patient during a secular bear market.

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