Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Investors, Be Warned: Frequency of Corrections Increases as Bull Market Ages

By

While corrections might resolve, it's prudent to remain on the defensive side for now.

PrintPRINT
One might actually be surprised to learn that 2013 is currently experiencing the lowest intraday volatility in almost 50 years (since 1965). That's not unusual in a long-term bull market.

When looking at the average historical daily trading range for the Dow Jones Industrial Average (INDEXDJX:.DJI), you'll see that volatility always increases or soars in a bear market. The 2008 financial crisis, and the popping of the Internet bubble in 2000, saw almost three times the volatility that we're experiencing thus far in 2013.

Historically speaking, it would be naive to expect today's low volatility to last-just as it would be foolish to hope the current bull market will last forever.

At 4.5 years, this bull market is already one of the longest since the Great Depression. Looking at the S&P 500 (INDEXSP:.INX) back to 1932, the average bull market duration is 3.8 years and, in comparison, this one is getting a little long in the tooth.

Still, it does have a few peers; of the 16 bull markets over the past eight decades, only five prior to this one lasted more than 4.5 years. Two of those extended bulls (1982 and 2002) peaked just six months later, ending at five years even.

The other three were super bulls which lasted between six and 9.5 years in total, which is 20 to 59 months beyond the duration of today's bull market.

Comparing the current bull market to the five previous prolonged bulls, it appears this one has had to climb a more challenging wall of worry.

My firm looked at the bull markets of the last 80 years that have extended beyond the 4.5 year mark, how many corrections they experienced, and how many of those corrections occurred before the 4.5 year anniversary versus after.

Not surprisingly, the longest bull markets (1949 and 1990) experienced the most total corrections. At 11 corrections to date, this bull market has seen more 5%+ pullbacks in the first 4.5 years than any of the previous extended bull markets. The others generally saw seven or eight corrections during this period.

Among the corrections in this bull market so far, two (in 2010 and 2011) went on to see greater than 10% losses. This is in line with the other prolonged bull markets which experienced zero to three 10%+ corrections in the first 4.5 years.

The more important aspect of our study is what happens beyond the 4.5 year mark. In the three longest bull markets, corrections became more frequent beyond 4.5 years, generally with two to three corrections annually in the final years before the peak (versus one to two annually in the earlier years).

All of the five prolonged bull markets experienced at least one additional 5%+ correction after the 4.5 year mark. Even the two five-year bull markets both managed to squeak in one more 5% correction in the six months before they reached the top.

Among the three longest bull markets, larger 10%+ corrections also appeared to happen more frequently. The granddaddy of all bull markets, from 1990-2000, had the rockiest finale of all, with a greater than 10% correction in each of the three years prior to the final peak.

History suggests that the frequency of corrections increases as the bull market ages. This fact alone could warrant a more defensive stance, but we have also started seeing some initial cautionary warning flags in our technical indicators over the past few months, which is added cause for concern.

While these might resolve, leading to a prolonged bull market, it's prudent for now to remain on the defensive side. Although we risk leaving some potential profits on the table, this strategy is in line with a safety-first philosophy.

Editor's Note: This InvesTech Research article by Jim Stack was originally syndicated by MoneyShow.

Below, find some more great investing and trading content from MoneyShow:

Bearish CrossCurrents

Compelling Case for Energy

Near Make or Break Levels


Twitter: @TopProsTopPicks
< Previous
  • 1
Next >
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE