SevenSentinels.com

Secular Trend

SevenSentinels.com
The "40-Year Cycle"

The Super Cycle, otherwise known as the Secular Trend is often called the "20-year cycle" (actually a 40-year cycle when taken peak to peak or trough to trough) because it defines the market environment for a whole generation of traders and investors, and tends to change roughly every 18-20 years from secular bull market to secular bear market, then back to secular bull again, ad infinitum.

Secular BULL markets are typically 18 (+ or - 3) year periods characterized by expanding valuations (P/E ratios, etc.), expanding public participation in equity markets, expanding speculation, and sharply rising prices. During a secular bull market, the entire Dow Jones Industrial Average or S&P500 will expand by as much as 10-15 fold or more. 1982 to 2000 was an excellent example of a secular bull market in all regards, as the Dow Jones Industrial Average expanded from the 700's to well over 10,000 in those 18 years.

Secular BEAR markets, by contrast, are periods of roughly the same length of time which are characterized by shrinking valuations, shrinking public participation, declining speculation, and range bound prices. The 1965 to 1982 secular bear market, for example, kept the Dow Jones Industrial Average range bound between roughly 500 and 1000 for that entire period as valuations, participation and speculation shrank markedly. The current secular bear market which began from the 2000 valuation peak clearly shares these characteristics, as even casual study will demonstrate.

Notice in the chart below 6 distinct secular cycles: 1909-1929 secular bull market (expanding), 1929-1945 secular bear (rangebound), 1945-1965 secular bull (expanding), 1965-1982 secular bear (rangebound). 1982-2000 secular bull (expanding), 2000-present secular bear (rangebound). We can expect that the current secular bear market, bound in the range of roughly DJ 6000-14000 to run until late in the next decade (2017+or-) at which time we can reasonably expect the onset of the next secular bull market which could take us another 15X+ higher to the area of 100,000 Dow Jones Industrial Average!

Chart courtesy of StockCharts.com

Why does any of this matter to a trader, particularly a "short term" trader? Precisely because context is everything! When one recognizes the current secular trend, he or she can then know how to expect the cyclical bull and bear cycles to behave. And that is important. Recognizing the current climate as a secular bear market, for example, the trader would have expected the the secular trend to stay rangebound, thus for the cyclical bull market cycle from 2003 to top somewhere in the vicinity of 1500 on S&P 500..... and he would have been RIGHT in 2007. "The crowd" labored under the delusion that SPX was on its way to 2500 or 3000 or perhaps much higher, and failed to get out of the way before the collapse of 2008. And most were very badly hurt. Likewise the trader who understands the secular trend in play would actually expect that this collapse is coming and would take it down at least into the vicinity of 800 if not lower. And his profits would have been spectacular had he traded that decline effectively. There was and will be in the future, a massive trading advantage in having that perspective. Context is everything. That advantage cannot be overstated.