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Cyclical bull, secular bear market part II
Posted By Barry Ritholtz On February 26, 2004 @ 4:44 am In Finance | Comments Disabled
Q: How do we know this is the lower high for the Nasdaq?
We know this is the high for a couple of reasons. No. 1 is that my good friend Ian McAvity of Deliberations Research has done some work comparing what he calls busted-bubble markets with the Nasdaq. The U.S. market in 1929, for instance, was a busted bubble, as was the gold market at the 1980 peak and the Tokyo market from the 1989 peak. His work shows the initial decline bottoms out approximately 2? years after the top. This time around that gave us a low in late 2002 and early 2003. Typically, there is a rally of 50% to 100% from that low. That rally usually lasts nine to 12 months. In terms of amplitude we are in line with the prior rallies and in terms of time we are a little long in the tooth. I lived through the Nifty-Fifty growth-stock era in the early ‘Seventies at Putnam Management. Big growth stocks topped out in 1973, went down tremendously in 1974, rebounded in 1975 and then went essentially nowhere for five to six years, even though in the vast majority of cases the growth in earnings still came through. One of my favorite charts is a long-term chart of McDonald’s from the ‘Seventies and early ‘Eighties. McDonald’s in 1973 peaked at approximately 75, went down to 22 in 1974, rebounded to 66 in early 1976 and then went sideways for the next five years. Interestingly, the earnings continued growing throughout that decade at a compounded rate of 25% a year and the company never missed a quarter. Despite all that, by its 1980 low, McDonald’s was selling at 10 times trailing 12-months’ earnings, compared with selling at 75 times trailing 12 months earnings in 1973.
Q: So has this been a sucker rally?
A: In the case of the Nasdaq. But then step back and look at other areas of the market. The mid-cap and small-cap indexes are making all-time highs. They are in secular bull markets. It is like a sailboat out in New York Harbor. The wind is pushing it one way and the tide is pushing it another way. The wind in this case is the technology stocks going south and the tide in this case is the rest of the market going north. And so the tug of war is between the two forces, and how much exposure they have to the wind versus the tide tells you which way they are going.
Q: How long, then, before a break in the Nasdaq occurs?
A: It could occur at any time. I turned negative on the Nasdaq in early November and it has gone up since then. I like to be early but not that early. The question is, if the Nasdaq goes down what will the rest of the market do? I prefer to observe what unfolds from other than a fully invested position, given the fact that when the Nasdaq goes down on a short-term basis of late, the rest of the market goes down in sympathy. The sectors that have done well — mid- and small-cap stocks have had sensational advances — could stage a 10% correction and not put a dent in their uptrends.
Trend Spotter: An Interview With Walter Deemer 
Nasdaq, which has been pacing the current bull run, is poised to tumble, says technician
Barron’s, MONDAY, FEBRUARY 23, 2004
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 more: http://bigpicture.typepad.com/comments/2004/02/walter_deemer_c.html
 Barron’s: http://online.wsj.com/barrons/article/0,,SB107732303981035500,00.html
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