Is it a secular bull or bear market?
He, as this blogger truly yours, withholds judgment
and merely portrays the different opinions. He quotes many names of market observers such
as such as Raymond James's Jeffrey Saut, Ralph Acampora, Laszlo Birinyi, which
are on the secular bullish side. Others, such as Douglas Ramsey or Joseph
Calhoun believe that valuations do not warrant a secular bull market.
My take on it is as follows:
If we are to appraise a secular bull market on
a technical basis, then we have to conclude that we are in the midst of a secular
bull market (higher highs on a secular basis see to it). Schannep, of “thedowtheory.com”,
whom I consider the best, clearly militates on this camp and believes we are
undergoing a secular bull market that began in 2009.
If we are to appraise a secular bull market based on
valuations, then we cannot declare a secular bull market, since valuations are
high (and were already quite high since the very inception of the alleged secular bull
market). No proper secular bull market has started with high valuations.
So we are confronted with a puzzling situation:
Technically we have a secular bull market, but valuations tell us that there is
long term headwind against higher prices.
From observing the market, I tend to believe that
valuations are more important when it comes to evaluating the very long term
(i.e. secular markets), whereas the technical makeup of the market rules over
the shorter term (i.e. swing trading and even to some extent cyclical bull and
However, things can be different this time. I know of “secular
bull markets” that have occurred in the absence of compelling valuations. To
name two: Weimar Germany and Zimbabue. If the markets anticipate inflation
ahead stocks will go up, even on a secular basis, even though valuations are
Furthermore, “valuations” are elusive. What if the yardstick
used to measure “cheap” and “expensive” 60 years ago has changed? Austrian
economists seem to believe that the larger the capital base of a society, the
lower the interest rate (discount preference) tends to become. Should we
discount earnings at the same rate than in the nineteen century? Don’t you thing
that the discount rate should be lower now? Thus, when using valuations (which
pertains to the appraisal of secular markets), we risk applying the wrong metrics.
So valuations can be elusive when it comes to declaring the existence of a
secular bull or bear market.
Furthermore, what if the markets realize that stocks
are being the facto “monetized” thanks to the Fed’s largesse? So many rounds of
QE (and hidden QE nowadays) may have transmitted investors that a stock is no
longer in the antipodes of cash but a surrogate which can be quite easily
redeemed into cash, if need be, and the Fed obliges. What level would reach the
S&P 500 if tomorrow the US Government would declare US stocks as legal
tender? Make this mental exercise. Wouldn’t stocks shoot up?
Of course, all my musings may be sheer stupidity, as I
am highly skeptical of all “economic/value-based” explanations of reality, mine included.
If we are Dow Theorists bent on trading the cyclical
(1-2 years) bull and bear markets, we know that technical considerations tend
to override fundamental ones. We also know (see my studies here and here) that irrespective
of the secular market condition (be it bullish or bearish) trading along the
cyclical bull markets tends to be profitable. In other words, even in the midst
of a secular bear market, the cyclical bull markets have posted positive
Thus, we shouldn’t try to be too smart and “time” our
cyclical bull and bear markets according to our perceived secular trend. Like
in trading, we just have to trade all cyclical bull markets. Of course, we will
make more if ex post facto we
happened to be in a secular bull market, but we don’t really know in real time.
All in all, the discussion of secular bull or bear
market seems to be counterproductive for Dow Theorists focused on spotting
cyclical bull and bear markets.
They have not changed. So what I wrote here remains
However, gold, silver and their ETF’s miners are
setting up for a primary bear market signal. Please mind that “setup” is not
the real thing. So trends have not changed
(not even secondary ones).
Look at the charts below and you will see:
1) Primary trend bullish.
2) Secondary reaction (pullback) against the primary
bull market (orange rectangle at the right of the chart)
3) Rally following the secondary reaction of enough
volatility-adjusted magnitude (blue rectangle at the right of the chart).
If the lows of the secondary reaction were violated, a
primary bear market would be signaled.
|SLV and GLD setting up for a primary bear market signal|
|SIL and GDX are also setting up for a primary bear market signal|
So now we have to monitor subsequent market action in
the precious metals arena.
The Dow Theorist.