Secular Bull & Bear Markets (Part I)

I began investing in 2000, I only knew maybe 10% of what I know now but I knew just enough to wait till that Tech bubble corrected, which happened in the spring of 2000, there were 2 good spots (not being able to see a few years ahead these were truly local minimums) to get in and I did...I didn't have much to invest and I was young so I went aggressive into a Global Tech Fund.  The returns were looking great till closer to the end of the year when I realized that these bubbles (unlike real ones) don't burst all at once, they can do so in many stages and I got in way to early!

I had to focus most of the decade paying off student debt so I just watched the markets, then of course 2008 happened...learned a lot studying that! At that time at work I was hearing a lot about Cyclical Bull & Bear Markets (they tend to follow the Business Cycle) as opposed to Secular Bull & Bear Markets (which follow much longer cycles, not correlated much to the Economy), one of my fave market gurus Barry Ritholtz discusses the differences here.

Finally, in 2010 I had decent size lump sum to invest but having grown up on the markets from 2000 to 2010 you can imagine I didn't have much faith in a standard 60/40 (Eq/FI) play or even just buying the World (MSCI World ETF - otherwise known as a Beta play). I had done calcs on how those standard investments would have done from say late 70's to just before 2008 (30y period) and the returns were impressive but that wasn't as real to me as what I actually saw happening from 2000 to 2010.  Also I had lots of ideas I had assimilated in my career and backtesting (as it can often do) told me let's try them, so I gave myself 5 years to have a concentrated portfolio of whatever my best ideas are at the time and see if with some luck (AKA market timing - as I later learnt is by far the biggest key!) I can make some real money!  I definitely had some good trades, I believe it was the Debt-Ceiling crisis in the summer of 2011 that I decided to put 90% of my portfolio into Gold!  That worked great, amazing to see how quickly you can make money, then when I was up 15% I had to decide how to get out...I ended up using a tactic from when I was a Quant for a Quantitative Equity PM, nothing fancy just pick a level 2% below and watch for that.  But of course I also had trades that went against me (more than 50% of the time as I do not seem to be better than most at market timing)...such as a Deep In The Money SPX Put strategy (basically a way to short S&P 500).

So all that leads to the most mind blowing investing concept I learned in ~15 years.  I saw that I will need some type of diversified portfolio (with the occasional overlay - MAYBE) but how could I trust the markets I grew up with in 2000 to 2010 (which by the way was a Secular Bear!)?  The answer was get a better understanding of Secular Bull/Bear markets, which is easier said than done as it doesn't come up in the Investment world that often since PM's/Traders look for short term incentives...so finding a sure (as sure as it get's in the Investment biz) fire way to make money that only takes 20-40 years (depending on starting pt) isn't going to be a hot topic!  But at the start of 2016 I saw this chart and it blew my mind!

Everything I knew and had been thinking about just came together and clicked into place once I saw this amazing chart, the key is that these are 10-year rolling returns, that's a fairly long time for the market (economic cycles usually last 3-6yrs) so we're getting a look at the forest not just the trees! I have a spreadsheet where I track major Indices and all ETF's I'm interested in, so I thought I should recreate the above and why not add a few more periods, namely, 5y, 15y & 25y!

In this last section, I'll explain a very simple strategy I came up with based on all this that does a pretty good job of letting me know when the market is getting too hot (end of a Secular Bull) and too cold (I call it the end of a Secular Bear but most gurus would call it the low point of the Secular Bear).  I use Yahoo Finance for free data and they only have S&P 500 data going back to 1950 so I can't recreate everything on that chart but it's enough.  Once I had the 5y, 10y, 15y & 25y rolling return vectors I studied them a bit to see what "too cold" would mean and what "too hot" would mean, just made an intuitive guess for cutoff levels then applied conditional formatting to highlight those periods.  Then I thought, what about times when all 4 periods fall into too cold/hot at the same time, if that happens it should be very significant!  Turns out it is and that's the power of this model, I'll give you a couple of examples (please note I'm not saying I can call market tops and bottoms in any accuracy greater than months but at these time scales it's quite sufficient...and it's not super difficult or impressive, at 10y or 25y the patterns move like glaciers!).

So as we go thru time (starting 1950) my simple conditional formatting technique calls for the low point of that particular Secular Bear (began in ~1959) in Sept-1974 (again that's based on monthly price levels) and if you look at the S&P daily data, it's very close to the daily low which I think occurred in Aug-1974. So this would have been a great time to get into the market (just buy & hold), then ride that till the next time we see a convergence of the cond. formatting which was Dec-1999.  At this point the 25y rolling return coincides with the since inception return and it's over 1800% (this would take a $100k portfolio up to $1.9m)!!!  Turns out Dec-1999 the S&P level was 1469...this time my method was off by ~8 months as the true top came Aug-2000 but only slightly higher at 1517 (based on monthly data but daily was somewhere nearby)...now this I don't mind at all because while my method got me out a bit early it was actually before all the crazy volatility of 2000!  Finally, the Secular Bear ensues and as is the case, rallies are outweighed by pullbacks and there's a general strong headwind which culminated in 2008/09.  This is when the 4 rolling returns once again coincided to indicate a low of this particular Secular Bear, in monthly data terms it was Feb-2009 and the S&P was all the way back to 735!  Again my method was a bit off, the daily data showed the true bottom in March-2009 at just under 700, close enough I say!  So this would have been the ideal time to get in and if I had money in early 2009 and I had this methodology worked out I would have gone all in (S&P is currently near 2300).  But from my 4 rolling returns I can see what that great chart above shows, we are either in the latter stages of the Secular Bear or in the early stages of the next 25-30y Secular Bull!!  Hooray!!!

Here's a chart I put together that follows S&P levels and the 4 Rolling Returns, it gives a nice visual (esp. the 25y return shows how near the end of a Secular Bull things get crazy and you make most of your money!) but I wouldn't rely on it to get in or out...the conditional formatting time series is what I use for that.  So that concludes Part I...in Part II, I will explain some simple/cheap ways to fully participate in this next Secular Bull and even where to put your money if it ends early (meaning during a Secular Bear...hint it ain't Equities haha and not even Bonds really...something more shiny 😀).