The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

03 January 2010

The Lost Decade?

Wow, if ever a concept meme took root and grew like a wildfire, the suddenly hot notion of a “Lost Decade” would be it. And none too soon either, now that the trading range is older than 10 years.

Most market commentators date the inception of this secular trading range to the market’s high of March 2000, which fails to agree with my perception that a trading range begins with its first breach above resistance, with subsequent tests to prove support. (Once resistance, now support.) We agree on the nature of the secular trend (sideways) and its typical length (16-20 years), but differ on how far along is the trading range, although we do agree the equity market, measured by the broad averages and indices, to be past the halfway mark of the process; I believe the market is ~75% through the trading range.

Moreover, I believe the first groups and sectors to enter their bear market will be the first groups and sectors to emerge into their new bull market. One theme that qualifies, but cuts across many groups and sectors, would be the large cap multinational companies. Almost to a one, their price high was achieved during Q2 1998, almost 12 years ago, so even from that inception, this trading range is 60 – 75% complete. Examples of the large cap multinational companies include Colgate-Palmolive/CL, Coca-Cola/KO, Johnson & Johnson/JNJ, McDonalds/MCD, and Wal-Mart/WMT among many possibilities. Bad news proliferates for many of these companies, but their stocks fails to make lower lows. I watch the lot of them for future signals of distress or success; the recent strength of Colgate-Palmolive/CL and McDonalds/MCD encourages me re the ultimate bullish resolution.

Folly, though, not to acknowledge the gathering weakness that cuts across groups and sectors: Apple/AAPL, Amazon/AMZN, Baidu/BIDU… well, this list could become rather lengthy, if not unwieldy. No doubt about it: global markets and economies are under attack on many fronts:
• Interest rates (now climbing in the US),
• The US$ (further rises augur more pain for commodities (oil, gold, etc),
• Terrorism (here and abroad),
• War (abroad),
• Etc
So many items to fret about. The bears who came late to the party (August/September 2008) caught correctly the hellacious decline that ended the trade across the range (to the lower boundary, and then some)… but then missed the near monolithic move higher of the past 10 months.

All good things come to an end, though, and the price rally of the past 10 months now withers quickly. An ending to the price rally need not equal a bear market, just a return of the trading range; just because the market rallied ~60% in 10 months, it remains bounded by its trading range. Which is another reason why all this talk of bull and bear market is so much nonsense; if you place the recent up trend within context, you are left with… a trading range. Trading ranges need not bounce from lower boundary to upper boundary, and then ricochet back to the lower boundary. In fact, most of the trading tends to be interior to the two bounds, a fact that Marty Pring captures exceedingly well in his recent reports, Are You Prepared For Another Lost Decade?
"Many investors and members of the financial press are only now recognizing that stock prices have lost ground over the last 10 years, labeling this period as the “Lost Decade”. In April 2003, Pring Turner Capital Group published an article which posed the question: “Whither the Secular Trend of Equities?” This piece laid out our case that the year 2000 was a secular or “long-term” peak for the U.S. stock market.The article also forecast a wide trading range market in the years ahead. Our goal with the forecast in this report is to help you prepare for the next ten years…"
To place within context a trend of any duration offers an initial step of pattern recognition, in addition to consistent success.

This post continues at InvestmentPoetry, with more distinctive insights from Marty Pring, in addition to specific recommendations, with annotated charts, from me.
-- David M Gordon / The Deipnosophist

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