This post is mainly addressed to the large number of perma bears, who have just recently come out

of hibernation! Welcome back guys, but be careful, because the glory days of 2008 might not last as long this time! Majority of the time on this blog I tend to do updates from the short to medium term perspective (Quick Market Update) as I follow the markets movements and fluctuations. After all, the blog is used as my own investment dairy and writing thoughts to paper helps one try and understand the huge volumes of data and news all of us are hit with on a day to day basis. With all that noise in the background, sometimes it is very easy to lose the long term picture, which in my opinion is far more important. For those that did not see the last long term update, please click here. The update warned on a potential turn coming up, where a cyclical bull could potentially end. Even though admittedly I was not extremely bearish, I wrote back then that: Since the cyclical bull market began on 09th of March 2009, it has lasted over 121 weeks and so far has gained 87.5%. As you may remember, the gain was over 100% at one point before the May and June correction started. While an average cyclical bull market tends to last 155 weeks with an average gain of 100%, the cyclical bull markets within a secular bear market tend to last only 126 weeks with gains of about 100% plus. So therefore by all definitions, we have achieved that average.

Note: The historical data in the bar chart above is complied since 1929 for the S&P 500. Majority of the global equity sectors and indices fell below 20% during the last week of trading, indicating that we are pretty much in a new cyclical bear market, even if it only ends up being a short lived panic crash like in 1962, 1987 and 1998 (yes I do read a lot of history).
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During Tuesday's intra day trade, S&P 500 briefly dropped below the 20% threshold which classifies it as a bear market. Therefore if we take that as a new cue, than from the chart above, we can see that the cyclical bull market lasted 112 weeks from 09th of March 2009 until 02nd of May 2011. The bull market achieved gains of 106% from the intra day low to intra day high. While the length was a bit shorter than expected, gains were very strong! Statistics show that during secular bear markets, cyclical bears can last up to 109 weeks. However, majority of the time, cyclical bear markets last about 74 weeks or just a little bit more than a year. More important than the time it takes to consolidate or correct, is the percentage point loss that the bear market takes away. The chart above shows that historically, bear markets since 1929 take away 36% on average. During secular bear markets this can be as high as 46%, but it is obviously skewed by the volatile 1930s. If the bear market goes down 25% or so, we will be testing a major support at around 1040 area - so keep that in mind.

My own secular bear market model was right on que, as can be seen from the chart above. I personally thought that the cyclical bull market from March 2009 could go a bit higher before it sucks in more investors. However, judging by the declines in majority of the sectors, the cyclical bear has most likely already began. Now, I do not think majority of the losses will be from percentage gains. I believe majority of the losses will be from inflation adjustment as the market will not go below March 2009 lows. Therefore equity markets could trade somewhat sideways over the next 5 to 10 years. Let me explain...
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The 1901 secular bear market lasted 20 years and topped at the start of the century, just like the 2000 secular bear market. It actually made a new nominal high in 1907, but still lost 67% from peak to trough, adjusted for inflation. However, nominally the market moved sideways for almost two decades and in nominal terms, actually bottomed in 1914. The 1929 secular bear market was a pure force of negativity, pain, suffering and staggering market losses. However, majority of the market losses occurred in the first 3 years, when the market bottomed nominally in 1932. Majority of the economic pain lasted for decades, but majority of investors fail to understand that markets discount news ahead of time, sometimes years and years out (this is what the 2008 crash most likely did). The 1966 secular bear market was a huge inflation problem after Nixon took away the Gold standard. The market lost 60% in inflation adjusted terms by 1982 lows. The bear market lasted for 17 years or so. However, nominally the market moved sideways for almost two decades and in nominal terms actually bottomed during the famous 1974 bear market - not that anyone knew it back that, because just like today, they were too busy being perm bearish due to bad economic conditions. However, as already stated, markets discount bad economic conditions years before they end. By the time you wait for the unemployment rate to drop from 9% to 6% and for de-leveraging to occur, the market will already leave you behind.
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The 2000 secular bear market topped as the interest bubble inflated and collapsed. The market is currently down 43% in inflation adjusted terms. If you do not believe the CPI figures published by US Bureau of Labor Statistics, you might not be alone. Using the old CPI method from 1970s, the market is down much much more. The current secular bear market is in a 11 year progress, if you believe, just like me, that it all started back in 2000.

While the market still might go down some more when adjusted for inflation, nominally the market will most likely move sideways for several more years even to the end of this decade. Most secular bear markets last around 17 years. The difference between the nominal low and real low is about 8 years, therefore the actual real low could come by 2017. Keeping that in mind, and focusing on the nominal low of March 2009, we can see that the 10 Year annualised return went as low as 1932, which was the greatest crash ever seen! The market has barley made a dollar over the last 10 years and most likely will not make a dollar for another 5 years. Summary: There will be more cyclical bulls and more cyclical bears. If history is any guide, chances are the March 2009 low, was THE LOW in nominal terms. Do not be like every other headless chook out there, saying that this is a repeat of 2008 and that we are going to go down much much lower. Even during the worst depression in history, the market never made a new nominal low after 1932, but the panic and fear just got bigger and bigger. This is already a much worse bear market than in the 1970s and 1910s. This bear market correlates closely to 1840s and 1930s within the history of the last 200 years! Remember, markets need DISBELIEF to climb the wall of worry. My own personal opinion is that stocks will be in a sideways range between 1,500 on the high side and say above 700 on the low side. It is just a rough estimate. For those that want to ride a real bull market - the answer is in commodities, as they benefit when stocks are in a secular bear market and adjusting for inflation!
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But after all I wrote here, you still remain stubbornly bearish like a true permbear deflationist who reads ZeroHedge.com every second hour, then you have to truly believe that politicians and central bankers will just stand by and not inflate the currency, while the markets and economy around them collapse. Throughout history, politicians and central bankers have always debased currencies instead of defaulting on debt and cleaning the system out properly. United States did it in 1970s and they will do it again in 2010s. Stocks will move sideways, while bonds and cash investors will be totally wiped out. That is why I always say stocks are the best house in a bad neighborhood, while I invest into commodities.

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