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FRED GOODMAN'S KEY INDICATORS FOR
INVESTMENT SUCCESS
I am a technical analyst. I have been since the 60's. You had to be one in those days because the stock market had little in common with the market most of you grew up with. From 1982 to 2000, all you really had to know was to buy as much as you could and hold on to it. Sure, you would do better if you had technical analysis in your tool kit so you could select the best sectors and the best investment styles (value, growth, large cap, small cap, etc.) -- but by and large, all you had to do was hold on. To do otherwise exposed you to the worst of all worlds -- according to the mutual fund salespeople, at least -- missing the best 10 days of the year. It's different now -- more like it was in the 60's and 70's. The best 10 days of the year come mixed in with the worst 10 days of the year -- you'll do better if you miss all 20. The observed differences in stock market performance seem to occur in extended periods, during different epochs, or market cycles. There are long epochs of 15 to 20 years (secular markets) and shorter epochs of 1 to 4 years (cyclical markets). Within a secular bear market -- and I believe we are in one now -- there may be several shorter cyclical bull markets that interrupt the decline. Within a secular bull market -- and I believe one ended in 2000 -- there are cyclical bear markets, like the ones we suffered in 1987 and 1998. The major characteristic of a secular bear market is volatility. In a secular bull market, prices steadily advance, little by little, over long periods of time that are occasionally interrupted by minor brief intervals of falling prices. However, in a secular bear the moves are violent in both directions and more frequent than in the secular bull. Lets look at some examples, broken up according to volatility. You may have a different idea about when the secular period begins and ends, and that is okay. What is important is to realize that there are differences between secular bull markets and secular bear markets, and to learn to trade and invest in harmony with whatever kind of market you find yourself. First just scroll down and look at the four charts below. Isn't it clear that each one looks different? I know that they are not plotted on log scales, so they are not proportionate -- but I have included percent markers which are proportionate. A loss of 50% is the same on each of the four charts. However, there were no big losses during the two secular bull markets, and that is the main point. We are very likely now two years into the start of a new secular bear market in which drops of more than 40% are common. That means there will someday be a fifth chart starting with the year 2000. Now if you have just eyeballed the four charts, I think you will see a difference between numbers 1 and 3, and numbers 2 and 4. I will quantify the differences as we go along and publish the results here in Key Technical Indicators for Investment Success. The first chart (below) shows the violent nature of the secular bear market following the market crash of 1929. The power of the declines and the rallies has not been matched since, and it usually surprises people when the see that there were two big rallies between 1932 and 1946 that would have increased their net worth five fold even with a 50% loss in the middle. But I still call this whole period a secular bear market.
The secular bull market from 1950 to 1965 (below) was characterized by quietly rising prices and interspersed by a few relatively small declines and quick recoveries after around one year.
The secular bear market from 1966 to 1982 (below) was characterized by violent swings in both directions. The period started and finished around 1000 in the Dow, but there were big profits to be made on the long side during four cyclical bull markets.
The next chart illustrates how smoothly the market rallied between 1983 and 1997. 1987 was the exception, but it was only 32% and over in a few weeks. I believe history will show that the secular bull market that started in 1983 ended with the peak in early 2000. I am expecting to see a period of predominantly falling prices interspersed with roaring cyclical bull markets during which big profits will be available to those who are willing to get in a bit late and get out a bit early. The first such rally may be upon us right now.
The above charts were arbitrarily cut into the four time spans simply by visual inspection. The next chart is a repeat of the one just above, with a measure of volatility over the entire period. In addition, there is a 200-day moving average of the volatility in blue. There is a case for dividing up the 75 years using the level of volatility to make the divisions. One can see that the volatility started to rise in 1986, well before the collapse in 1987. Then it rose again in 1997 and has not come down yet. After I have studied the period in more depth, I will present the charts, sectioned according the level of volatility, and post it in Key Technical Indicators for Investment Success.
Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. You can send him your questions and comments via email at Fred@MarketMonograph.com. The charts and commentary represent what Fred is thinking about the market and thinking of doing for his own account and for accounts he manages. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information. 
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