Market Observations with Chris Puplava

Chris Puplava

The Road Ahead

Using the 1970s Secular Bear Market as an Analog to What May Lay Ahead

By Chris Puplava, March 11, 2010
Co-Manager of PFS Group's Precious Metals Managed Account, Energy Managed Account, and Aggressive Growth Managed Account
"History doesn't repeat itself, but it does rhyme." – Mark Twain

Over the course of the last two years I’ve frequently taken a step back to look at the big picture in terms of secular trends (decade long cycles) versus the cyclical trends (year long cycles) in the stock market. Looking at past cycles and current trends I estimate a secular bear market low will occur in 2014 to 2015. The support for this estimation can be found in the following three articles below.

10.08.2008 - Are We There Yet?
10.15.2008 - Secular Sign Posts: The View from 30,000 Feet
12.17.2008 - Turning Japanese?

An analyst whose work I greatly respect and has had an influence on me is the work of Barry Bannister from Stifel Nicolaus. Mr. Bannister made a major call early last decade for a secular bull market in commodities and a secular bear market in stocks, and looking over the last ten years certainly justifies his call. Recently Mr. Bannister was on the March 6th, 2010 Financial Sense Newshour (FSN) and interviewed by Jim Puplava. For the interview Mr. Bannister provided a summary version of his recent institutional research report, which can be accessed by clicking on the following link (Report).

Within the report Mr. Bannister points out that the nominal low (non inflation-adjusted low) for a secular bear market often occurs prior to the real price low (inflation-adjusted low). This was the case in the 1907-1921 and 1966-1982 secular bear markets, while the 1932 low in the 1929-1942 secular bear market marked both the real and nominal price low. Mr. Bannister’s comments on this are provided below from his FSN report.

Secular bear markets flatten in nominal terms (but decline in real terms, after inflation) for ~14 years (average of the past cycles below), and this secular bear began in 2000. The nominal low in a secular bear is usually seen ~7-10 years before a new secular bull begins, and we believe 2009 may have been the nominal low in this cycle.”


Using the 1970s secular bear market as a road map, we appear to be following that script fairly closely. If we continue to track the 1970s analog we should have a correction sometime in the first half of 2010. This would then be followed by a year end rally carrying us into 2011 where the S&P 500 would stall before rolling over into a new cyclical bear market that leads to a real price low in 2016. From there we would enter a new secular bull market in stocks and returns could be explosive as we close out the decade, just like Mr. Bannister’s forecast of a back-loaded 2010-2020 performance (see report comments, page 2, point number 2).

Inflation-Adjusted S&P 500: 1970s vs 2000s

While the secular bear market low in inflation-adjusted terms would not occur until 2016 if we followed the 1970s analog, the nominal price low for the S&P 500 occurred in 1974 with the S&P 500 never breaching that low for the rest of the secular bear market. If inflation picks up over the next several years and the stock market doesn’t implode circa 2008, then the March 2009 low may in fact mark the nominal price low for the present secular bear market.

Nominal S&P 500: 1970s vs 2000s

The other aspect to consider that Mr. Bannister brings up is that the secular bull market in commodities is getting a bit long in the tooth and vice versa with the secular bear market in U.S. stocks. Commodities in 2008 reached the extremes in terms magnitude with its annual increase on par with prior secular bull markets, while stocks are at their secular bear market extreme lows. This would argue for a gradual leaning towards paper assets versus hard assets over the next few years. However, one thing that I think may elongate the current secular bull cycle in commodities is peak oil as well as the industrialization of China/India. When looking at the commodity chart from Mr. Bannister on the left below, you can see that the late 1800s secular bull market in commodities was elongated by the Industrial Revolution and the early 1900s secular bull market was elongated by WW I. The current secular bull market may be elongated by peak oil and/or the industrialization of Chindia, arguing for maintaining a longer holding period for an overweight in commodities than the historical average. Given also the extreme monetary conditions present throughout the globe, this too could be a factor that extends the secular bull market in commodities which benefit from highly expansionary policies. Mr. Bannister’s thoughts from his FSN report on commodities versus stocks debate are provided below

“Commodity price momentum appears to be coming off a cyclical high (left chart), while the S&P 500 total return (price change + dividend) momentum appears to be coming off a cyclical low (right chart). The balance of years in the next several probably favor U.S. equities over commodities until (if) inflation materializes, which we do not expect until ~2013.”


In returning to the 1970s secular bear market in stock analog, if we are to follow the 1970s script going forward then a pure buy and hold strategy will likely produce flat nominal returns and negative real returns until 2015-2016. Instead of being beholden to this sub par performance, investors could use volatility to their advantage by riding the explosive cyclical bull markets and sidestepping the cyclical bear markets. One tool in the risk management tool box that served well during the 1970s was using the weekly 15/40 exponential moving average (EMA) cross system. Sell signals are given when the 15-week EMA crosses below the 40-week EMA and buy signals are given when the 15-week EMA crosses above the 40-week EMA. The performance of this EMA system during the 1970s below highlights its effectiveness as a solid risk management tool.

Source: Bloomberg

Not only did the system work well during the 1970s secular bear market, it also worked well in the 1930s secular bear market and even in the most recent secular bull market of the 1980s and 1990s.

Source: Bloomberg

Source: Bloomberg

As I have said before, there are no investment black boxes, just tool boxes, and the 15/40 weekly EMA system is not infallible, just useful. If readers are interested in how to create the 15/40 week EMA system for the S&P 500, they can do so by following the procedures I gave near the end of a prior article (The Guy behind the Guy Is You and I). If we are to continue following the 1970s secular bear market road map in the years ahead, then the 15/40 week EMA should prove highly useful. Looking at the current 15/40 week EMA for the S&P 500 shows that we are in no immediate danger of generating a sell signal, and given the market’s recent strength and breakouts in advance-decline lines for major indexes, new highs are likely in the months ahead.


Chris Puplava

© 2010 Chris Puplava

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