Market bears shuffle back to their caves

Is the 12-year-old secular bear market on Wall Street officially over? The US market, measured by the broad S&P 500 Index, has rallied 25 per cent since early October 2011 and has more than doubled since the crisis days of March 2009.

Is the 12-year-old secular bear market on Wall Street officially over? The US market, measured by the broad S&P 500 Index, has rallied 25 per cent since early October 2011 and has more than doubled since the crisis days of March 2009.

By any measure these are impressive gains, and investors who have picked the various lows have made truckloads of money. All at a time when the world is supposedly going through its worst debt crisis in 80 years.

To make an outright declaration that the bear market is over would be premature. However, there is a distinct possibility that by the end of this calendar year or early 2013 we may be in a position to farewell the bear that has hindered the globe for more than a decade, and welcome the bull to rapturous applause.

And here is the reason why. All of the major US stock indices are close to the level they reached in April last year, when trepidation of sovereign debt in North America and Europe crippled investor sentiment.

Most technical analysts of the sharemarket believe this level is a major resistance line and most markets are due for a breather, pull back or whatever cliched term you would like to use for a brief decline in prices. Technical levels, like rules, are made to be broken.

More significantly, the broadly-based S&P 500 index and the popular Dow Jones Industrial Index of 30 stocks are within 10 and 15 per cent of their record highs, hit in late 2007.

In previous secular bear markets, such as in the 1930s and 1970s, when the major stock indexes have breached the previous record high by any margin, they have tended to continue with the upward surge for many years.

This officially ended those secular bear market on both occasions. In 1954 when the Dow Jones Industrial Index surged passed the 1929 high, the index kept rising for more than a decade. In 1982, when the Dow hit its highest point, it raced higher for five years.

So what chance of a secular bull market by close of trade 2012? Seasonally, the US market has a habit of making the bulk of its gains from the October through to April. The summer months of the northern hemisphere are renowned for anaemic gains or losses.

There are no convincing reasons for this seasonality, except the numbers don't lie. Since last October the US market is following the script almost perfectly. Therefore we could expect the US market, after a thumping run, to take a breather through the middle section of the year.

If the period from May to October registers a mild decline or flat performance the S&P 500 and the Dow Jones Industrial indexes will be set to make a genuine charge at a new record some time between October 2012 and April 2013. This would officially end the secular bear market. Alternatively, if the indexes fail to breach the old record in those positive months, then you know the bear is still in town.

Doom merchants who pontificate endlessly about the problems of the world would be quick to discount the likelihood of the end

of a secular bear market and the beginning of a secular bull market. After all, a conclusion to this secular bear market by year's end would make it the shortest and least painful this century.

On the face of it this would seem a highly improbable scenario, given the enormity of the bull market from 1982 to early 2000 and the record valuations, based on earnings, the market hit at the turn of the century.

I have been in this camp and I'm struggling to come to terms with current events. That said, no secular bear market has ever had a ferocious opponent such as the chairman of the Federal Reserve, Ben Bernanke, or for that matter his predecessor Alan Greenspan. Bernanke's bazooka is firmly aimed at the collective temple of US investors.

The bears could well be right and the pall of European and US sovereign debt could eventually overcome investors who are enjoying the boat ride of a lifetime on a river of liquidity provided by Bernanke and his European counterparts.

No one can and should pretend to tell you how markets will react to two such powerful forces. History though should provide much clearer observations.

What does this mean for Australia? The picture seems a little clearer on the domestic scene. The benchmark All Ordinaries Index is still a whopping 37 per cent from its highs of November 1, 2007.

No doubt that if confirmation comes later this year the US sharemarket has broken into an official bull market, there would be a boost to equity markets around the world. Another comforting fact is that our two domestic secular bear market in the 1970s and late 1980s took about five years before entering a sustainable recovery. In November this year, we will hit that five-year mark.

Hopefully, by that stage the Reserve Bank would have cut interest rates considerably on the back of a stalled economy and the Australian dollar would have sunk back to its historical average of about 75?.

Both would prove major boons to local investor confidence.

Matthew Kidman is a former fund manager, author and director of WAM Capital.

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