Secular markets (bull and bear) in developed, advanced economies (with economic stabilizers, a more diverse economic base and a well developed policy response system) are distinct from those in developing/emerging economies (with fewer economic stabilizers, a less diverse economic base, and a less developed policy response system).

Due to the key economic differences noted, the equity markets of each economy are distinct. For example, secular bear markets in developed economies like the US tend to be “range-bound” affairs; a more severe and slowly recoverable down trend tends to be experienced in developing economies. Now, for the cyclical part of the discussion.

Cyclical markets (bull and bear) tend to run over a much shorter time period -- typically no more than a few years -- often matching the business cycle. Both secular and cyclical markets have many crosscurrents, and always have moves within moves that run counter to one another.

In fact, this is precisely what seems to be occurring in the current bear market. The secular bull market in commodities is experiencing a cyclical bear correction, while the secular bear market in many other sectors, notably financials, is enjoying a cyclical bull rally.

Investment Strategy Implications

I could go into more depth and detail, but let me let provide you with 2 key takeaways from this mini lecture that pertain specifically to today’s market:

1. The secular bear market we're experiencing in the US (and in most developed markets) is a range-bound affair. It began in 2000 (or 1998, if you look at many lower quality issues) and likely won't run its course until the middle of the next decade.

The price action thus far fits the range-bound scenario, with an S&P 500 peak of just over 1500 in spring and summer of 2000, matched by last fall’s touch at that same level. See the chart below.


Click to enlarge

Now that we've reached that peak, the current decline will take us down the range, possibly reaching the trough attained in the summer and fall of 2002, and again in the spring of 2003 - just under the 800 level.

2. With the larger mega-trend established, it's in the interplay between the secular and cyclical that a fair amount of money can be made both on the long and short side.

For example, the cyclical bear market (correction) taking place within the secular bull market in commodities and other globalization beneficiaries presents longer-term investors with an opportunity to buy into their secular bull trend. I think it’s called buy low, sell high - with buy low meaning a willingness to go against the crowd. Momentum players need not apply.

Conversely, the secular bear market in financials and the current cyclical bull rally presents investors with an opportunity to exploit the situation by either riding the cyclical rally for a short term profit or selling into that rally to reduce an investor’s exposure.

As for the exact time period of the cyclical trends (bull market corrections and bear market rallies), that's where artistry and skill comes into play. This is where fundamental, technical and quantitative analysis become invaluable tools.

Understanding the many faces (and facets) of the bear can help frame the larger context - and can lead us to more immediate, actionable ideas.

Class dismissed.