Running with the bulls

Long-term averages suggest shares are still relatively cheap, and have every reason to keep rising.

Summary: Historical analysis shows the secular bear market that started in 2000 could end in 2013 and generate a wave of prosperity similar to that enjoyed from 1982-2000.
Key take-out: As long as central banks keep cash rates low and bank liquidity high, shares will remain attractive.
Key beneficiaries: General investors. Category: Portfolio management.

The most important stockmarket in the world is Wall Street, and the most important share indices in America are the S&P 500 (the top 500 listed companies) and the Dow Jones Index (the top 30 or so stocks weighed equally). The Dow Jones Industrial Average still survives because it’s been around since 1896, and so carries the mystique of antiquity.

Both the S&P 500 and the Dow Jones are now close to their all-time highs of October 2007, after which they fell over a 17-month period to trace out the worst stock crash since 1987. The stockmarkets of the world followed suit. (Indeed, Australian stocks on our own ASX hit a four-year high as the ASX 200 broke 5070.5 on Monday, its highest point since August 2008.)

Both indices have enjoyed a strong rally since March 2009, but whether that turns out to be just a primary bull market within a larger secular bear market that started in January 2000 or a genuine secular bull market in its own right might soon be known. If the S&P 500 and the Dow Jones shoot significantly above the twin peaks of January 2000 and October 2007, many analysts will declare the global financial crisis over and welcome a new dawn.

The secular bull viewpoint…

Bulls say we should look back further than the last century to accurately discern patterns for secular bear markets. As the following chart dating back to 1700 shows, there is no law that says a secular bear market will always behave the same way.

Indeed, history shows such bleak periods lasted for between 12 years and 70 years. So it’s quite possible that the secular bear market that started in 2000 will end in 2013 by breaking out of its trade-ranging wedge.

Technical purists argue share charts should always be scaled logarithmically so that recent prices are shown in correct proportion to past prices. A logarithmic scale suggests that shares are at the bottom of a long tunnel sloping upwards. Except for March 2009, the last time there was an opportunity to buy this cheap was in 1981.

By contrast, a linear (or arithmetic) scale suggests that shares are trading slightly above their long-term mid-trend line. Technical purists reject this common way of drawing charts as distorting the truth.

Fundamental analysts who agree the worst is over support this argument with various charts.

First they argue that for now, for the first time since 1955, the average dividend yield is holding below the 10-year Treasury bond yield. 

As long as central banks keep cash rates low and bank liquidity high to boost investor and consumer confidence, shares will be more attractive than fixed-interest securities.

They also argue that the local All Ordinaries index price earnings ratio has not yet run ahead of its long term average of 14, and that the index’s dividend yield remains above its long-term average of 4.1%. This means shares are still relatively cheap, and so have every reason to keep rising further.

Bulls say the last three years have demonstrated that stockmarkets quickly recover from country-specific political and economic shocks. Central banks won’t allow liquidity to dry up again, as happened in 2008, which is why they continue flooding the world with cheap money. As more investors realise this is a once-in-a-lifetime opportunity to borrow at historically low rates to invest in under-priced tangible assets (eg, shares and property) there will be a fall in risk premiums, pushing up share prices relative to earnings. In their view we are entering a new secular boom that will generate a tidal wave of prosperity like we enjoyed from 1982-2000.

Furthermore, as January goes, “so goes the rest of the year”. Since 1950 there have been 39 “up” Januaries and 24 “down” Januaries. Out of those 39 positive Januaries, the S&P 500 went even higher for the rest of the year 34 times, which is an impressive 87% success rate. Digging deeper into the data, going all the way back to 1928, Merrill Lynch found that the average annual return for the S&P 500 was 12.7% in years when January was up ... compared to an average annual decline of 2.3% when January was down. So, even if the share rally that began in March 2009 proves to be a primary bull market within a longer secular bear market, the January indicator suggests that shares have at least another year to run.


I avoid forecasting as I think those who pin their hopes on a particular scenario coming true take massive risks that can either make or break their fortunes. Instead, I prefer to be opportunistic, going with the flow when the market soars, but retreating whenever it ebbs or, worse still, plunges. That means trend-following the All Ords index to catch any up-wave (as I have done since July 2012) and sidestepping any down-wave (as I did after April 2011). Of course, whipsaws occasionally bite me, but they have never been big enough to sink me.

Trend-following the market serves two purposes:

  • As a safety-net should the third peak of the S&P500 turn out to be a cliff for world sharemarkets; and
  • As a ski-lift should the S&P 500’s latest peak be the foothill to the start of soaring global share mountain.

You can do this either by using a professional market-timing service or doing it yourself, using a common 50 by 200-day moving average crossover strategy. As you can see from the following chart, whenever the All Ords index’s blue medium-term trend-line (a 50-day moving average of the index) was above the index’s red long-term trend-line (a 200-day moving average of the index) it was safe to be in the sharemarket, and whenever it was below it was unsafe.

Respecting that rule would have kept you out of the 2008 crash, got you back for most of the 2009 recovery, and kept you out of harm’s way since then. It would also safeguard you from another crash unless it was as steep as 1987 (which is where professional market timing has an edge over doing it yourself).

Percy Allan is chairman of Market Timing Pty Ltd. For a free three-week trial of their Weekly Update bulletin and signals for trend-trading Australian exchange funds, visit

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