Tactical Management In The Secular Bear Market

Overview

Tactical Management in the Secular Bear Market examines the following points:

. The big picture of the market and economic variables that move the market.

. The catalysts behind a new secular bull market

. Market forecast.

. Tactical management in the cyclical bear and bull markets

. Global psychology management between clients and management team.

. Tactical risk management in each market phase.

The author has presented a framework for identifying the four market phases that ...

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Overview

Tactical Management in the Secular Bear Market examines the following points:

. The big picture of the market and economic variables that move the market.

. The catalysts behind a new secular bull market

. Market forecast.

. Tactical management in the cyclical bear and bull markets

. Global psychology management between clients and management team.

. Tactical risk management in each market phase.

The author has presented a framework for identifying the four market phases that identify the bear market and the two market phases that identify the bull market sufficiently detailed without being overly technical. The market phases were the platform to address the above points to analyze and make recommendations to advisors,fund managers, and professional traders.

The author has included many interviews with fund managers, advisors, and professional traders in order to learn how they manage their risks, psychology, and portfolios in both good and bad markets.

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Product Details

  • ISBN-13: 9781452079486
  • Publisher: AuthorHouse
  • Publication date: 10/6/2010
  • Pages: 272
  • Sales rank: 1,097,704
  • Product dimensions: 0.75 (w) x 9.00 (h) x 6.00 (d)

Table of Contents

Contents

Preface....................vii
Acknowledgments....................ix
Introduction....................1
Part 1: The Big Picture....................4
Chapter 1: The Secular Market Analysis....................5
Chapter 2: Spotting Cyclical Bear Market Reversals....................31
Part 2: Tactical Management in a Cyclical Bear Market....................42
Chapter 3: Cyclical Bear Market Phases Analysis....................43
Chapter 4: Tactical Management in a Cyclical Bear Market....................62
Part 3: Tactical Management in a Cyclical Bull Market....................80
Chapter 5: Cyclical Bull Market Phases Analysis....................83
Chapter 6: Tactical Management in a Cyclical Bull Market....................94
Part 4: Tactical Psychology Management....................121
Chapter 7: Investors' Psychology in a Cyclical Bear Market....................125
Chapter 8: Investors' Psychology in a Cyclical Bull Market....................143
Part 5: Tactical Risk Management....................149
Chapter 9: Tactical Risk Management in a Cyclical Bear Market....................155
Chapter 10: Tactical Risk Management in a Cyclical Bull Market....................166
Part 6: Professionals' Management Techniques....................173
Chapter 11: Professional Traders....................174
Chapter 12: Fund Managers....................215
Chapter 13: Investment Advisors....................231
Chapter 14: Professional Risk Managers....................243
Glossary....................256
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First Chapter

Tactical Management in the Secular Bear Market

How Tactical Management and Market Phases Can Help Manage Risk and Make Money in the Secular Bear Market
By Tahar Mjigal

AuthorHouse

Copyright © 2010 Tahar Mjigal
All right reserved.

ISBN: 978-1-4520-7947-9


Chapter One

The Secular Market Analysis

A secular bear market consists of a series of sequential bear markets with 30% or greater of sideways or downward market movements over a prolonged period. A secular bull market consists of a series of sequential bull markets with a 30% or less correction rate over a prolonged period of market movements. Smaller events that happened within the secular bull market have shocked the market but had little lasting effect on the economy or market compared to other macroeconomic factors that carry systematic risks such as inflation, rising interest rates, currency effects, and rising unemployment.

Some of those events that have triggered corrections within the secular bull market include:

1963: John F. Kennedy assassination 1982: Mexican default 1987: Black Monday 1989-1991: United States savings and loan crisis 1989-1991: Latin American debt crises 1992-1993: European monetary system crisis 1994-1995: Mexican peso crisis 1997-1998: Asian financial crisis 1998: Russian default and Long Term Capital Management (LTCM) 2002: Argentine default

Since the early 1920's, we have had three major bear markets and each accompanied a crisis:

1929-1932: Market crash

1973-1974: Oil crash.

2008-2009: Financial crisis

There were three major breath-taking secular bull markets: 1922-1929, 1932-1965, and 1974-2000. Each of these secular bull markets found its bottom in the early stages of the secular bear market-trading range.

In order to simplify this analysis, we will use the Dow Jones Industrial and Standard and Poor's composite indices in our long- term historical charts.

The secular bear market moves within its high for several years before it can resume a new uptrend.

It appears that at the end of every bull market, a consolidation period takes place via a series of bear markets over a prolonged trading range period (see chart 1.1).

When tracking the primary trends, one must consider that some market indices are biased towards certain industries or market capitalizations, such as the NASDAQ, Dow-30, and Russell 2000.

The NASDAQ and Russell 2000 are unreliable measures for identifying market tops and bottoms because their trends are too volatile. The New York Stock Exchange index is a preferred measure for monitoring the market; however, these volatile indices provide excellent early reversal signals. For example, the peak of the NASDAQ in 2000 was an excellent indicator of the end of the secular bull market that began in 1974.

In the 1920's, the stock market was going through the roof, and the U.S. economy was booming. Consumers were spending beyond their means and investing without using any risk management measures.

Investment during this time was based on excessive margin buying, and investors bought stocks with borrowed money from brokers and banks. When stocks crashed in 1929, the stock market went into a downward spiral that brought the market down 89% in 1932.

The market had recovered approximately 50% of its losses by 1937 following its bottom in 1932 before reversing into another bear market. Then it did not retest the 1929 high until 1955.

Six important factors caused the Great Depression in the 1930's:

1. Stocks dropped 89% from October 1929 until the summer of 1932.

2. There were massive bank failures and credit tightening.

3. A significant decline in consumption caused a growing economic slowdown.

4. Unemployment skyrocketed to over 20% of the workforce.

5. The total consumer debt burden rose.

6. American economic protectionism occurred when the U.S. government imposed tariffs or quotas on steel and other product imports.

After the end of World War II in 1944, the market consolidated and broke upwards from a multiyear technical triangle pattern as confirmation that a new bull market had began.

The catalyst behind the beginning of the new bull market was a combination of the boom in industrial production and the demand for commodities to rebuild European infrastructure after the war. As a result, the United States economy enjoyed approximately 16 years of expansion, and the market rallied through 1966.

The secular bear market began in 1966 and ended in 1982, encompassing sixteen years of trading range with four waves of bear markets. Adjusting for inflation, the trading range from 1966 to 1982 felt like two decades of a bear market with chart patterns of lower lows and lower highs.

In 1982 unemployment and inflation rates were at their peaks. The early 1970's was a period of rapid inflation, leading to negative real bond yields as equity prices collapsed.

The 1973 to 1974 bear market was the worst in the secular range. The Federal funds rate rose to 12%, and inflation was near 17%. The prime interest rate rose to 21.50% from a low of 5% in the early 1970's.

Other issues included:

Dramatic rise and fall of oil prices.

Inflation was out of control.

Banks were unstable and in a weak position.

Commodities prices were rising.

The dollar was weak.

The 1973 to 1982 market consolidation formed a triangle pattern, and in 1982, the market blasted from this triangle into a powerful bull market.

The catalysts behind the beginning of this bull market were: technological innovation, the entrepreneurial minds of baby boomers, easy access to money, and the low taxes environment. All of these factors led to the greatest wealth building and longest bull market in American history.

The new millennium began with the technology crash in 2000, marking the beginning of the current secular bear market. We experienced two waves of bear markets: the technology crash in 2000 and the financial crisis in 2008. If we adjust for inflation, the S&P composite chart would be in a downward trend with lower lows and lower highs from 2000 to the present.

Issues and Problems:

The massive U.S. budget deficit

The dollar was weak

The 2008 financial crisis

The technology crash in 2000

Commodity prices skyrocketed

The United States began the Iraq war in 2003

Unemployment rose to over 10%

The inflation trend had reversed upward

The market was overvalued in 2000 and 2007

The de-leveraging of the private sector

The 2000 to 2010 secular bear market has some similarity with the 1970's and 1929 secular bear markets. The current secular market environment is less severe than in 1929 and worse than in the 1970's.

The differences in today's market include:

The U.S economy is more diversified than in the past.

A shift toward globalization as the developed world has shifted some of its capital to emerging market countries.

The government is dealing with problems more efficiently by learning from past domestic and international crises.

What are the new bull market catalysts at this time? How long will this secular range last?

In order to answer these two questions, we must first study certain historical economic indicators and perform a historical analysis on past secular bear markets.

Technical Read of the Economic Factors

Unemployment versus SP Composite Index

Unemployment has:

Bottomed in 1929 and peaked in 1945

Bottomed in 1968 and peaked in 1982

Bottomed in 2000 and has not yet peaked. My expectation is the peak will be reached in 2021.

The unemployment rate is also cyclical within the secular range. The cyclical range follows the four-year presidential cycles and political party terms. While unemployment is up trending within the secular range, the reversal points are found at the beginnings and ends of every new presidential cycle and political party's terms

1966-1982 Secular Range:

The unemployment reversal points were in 1971, 1974, and 1982.

2000 to Present Secular Range:

The unemployment reversal points were in 2004, 2010, and are expected to peak again in 2012 and 2017. Given the severity of the recent crisis and the time needed to repair the financial system and economy, the 2012 and 2017 job peaks are unlikely to be the final unemployment peaks. These peaks will represent only a temporary retreat before we see a new high, and I believe the job market will likely reach its final peak until 2022; the market bottoms before the unemployment peaks. (See chart 1.6):

The chart shows the unemployment tops versus S&P composite index bottoms since 1948. Since 2000 the S&P composite index has been in a consolidation phase while unemployment has been in an uptrend.

The unemployment trends are negatively correlated with the market. The unemployment uptrend, inflation, price earnings ratio, and commodities cycles begin and end with the secular range.

Should we expect inflation or deflation?

The inflation rate has reversed to a new uptrend in 2000 (see the S&P composite below in real prices).

Since the secular range is not going to be over any time soon, the inflation rate will follow it with even higher unemployment. The secular trends of the S&P composite index inflation adjusted from 1966 to 1982 and 2000 to 2010 are now in a downtrend with secular bear markets having lower highs and lower lows.

The 1929 to 1945 market consolidation pattern was normal because of the deflationary environment. I believe we have yet to see the mother of all rallies in commodities and inflation regardless of higher employment. The higher inflation will likely to have an effect on the stock market in late 2016.

There is a lag between the stock market and inflation rates. The first two years' rise in inflation does not have an immediate effect on earnings. Stock prices and inflation rise at the same rate in this period. Companies' earnings growth will not be hurt until inflation begins to squeeze their profit margins.

Price Earnings (P/Es)

Historically, valuation tends to overshoot to extremely high levels in the bull market, extremely low levels in the secular bear market, and reverts to the mean during market consolidation. The P/E multiple was compressed in all three secular bear markets as follows:

In the 1929 bear market, the P/E multiple declined from 32.5 to 5.6.

In the 1973 to 1974 bear market, the P/E ratio declined from 18.7 to 8.7.

In the current secular bear market, the P/E declined from 44.20 in 2000 to 13.4 in 2009.

The chart below explains the historical pattern of P/E ratios and S&P adjusted composite inflation.

Commodity Prices

Commodity tends to bottom and peak in the opposite direction of the market.

The historical commodity long-term reversal points were in 1933, 1952, 1970, 2002, and are expected in 2021 (see chart below).

The commodity cycle tends to last 18 to 20 years, the same duration as the secular bear market. The commodity also is secular in nature, but it is not correlated with the equity market.

Secular bull market in commodities:

1932-1951 1971-1982 2002-2022

Secular bear market in commodities:

1952-1970 1982-2002

The ten-year Treasury yield index topped in 1982 and has not gone back up. The yield is trading within a downtrend channel, containing some cyclical moves within the range. The smart money has been buying the lower range and selling the upper range of the channel; however, the positive correlation with the U.S. dollar did not materialize until 1985 when the yield reached 8%. The dollar then topped out, and foreign investors became sellers of the U.S. dollar. The 8% yield was the minimum risk rewards the foreign investors were willing to accept in order to invest in the U.S. treasuries. The buying spree of the dollar was between 1980 and 1985 when the yield was 8% or greater. It was sold thereafter when the yield declined below 8%. The dollar has been in a downward trend since 1985.

The dollar topped out in 1985, and gold topped out in 1980. There is no long-term correlation between gold and the U.S. dollar, but there is a negative cyclical correlation between the two (see chart 1.12).

Another long-term pressure on the dollar is the globalization effect. Since early 1990, U.S. investors were exporting capital outside the U.S., particularly in recent years. The deficit is only an additional pressure on the dollar because of globalization trades.

In order for the dollar to reverse back up to a new long-term secular trend, one of these scenarios must happen:

1. The ten-year treasury yield must rise to at least 8%, which is not sustainable in the longer term as we saw from 1980 to 1985. A higher yield is not desirable by the U.S to maintain its global competitive advantage.

2. The U.S. economy must maintain strong economic growth.

3. Export and import trades must be balanced. This will only happened if emerging countries balance their imports and exports with the U.S. Most emerging countries are exporting nations.

The dollar will be low for many years to come with some cyclical upside movements due to a temporary rise in the ten-year treasury yield and/or the concerns of investors about other foreign currencies.

Historically, a strong currency peaks and never looks back. The story of the British pound is similar to that of the U.S. dollar. The pound was very strong in the early 20a' century until the U.S. dollar replaced it as the world's strongest currency. The pound has since declined. The dollar reached its peak in 1985 and never looked back, and no other currency can yet replace the dollar. Before 1985 the U.S. economy was strong without the globalization factor because of its strong internal economic growth.

The euro is not qualified as reserve currency. The euro zone is made up of 16 different countries, economies, languages, leaders, political systems, and cultures. The euro zone is subject to sovereign debt problems, representing a significant threat to the euro.

Due to the globalization trend, a newly created international agency such as the International Monetary Fund (IMF) will create a global currency reserve (G) to replace the U.S. dollar. The dollar and the euro will both still exist, but the dollar will likely lose its reserve status.

Let us now examine the behavior of the past and current secular bear markets.

The Secular Bear Market Cycles and Market Phases The secular bear market contains a series of market cycles, and one of those cycles is a crisis with a severe bear market overshooting the lower range of the secular bear market. Each cycle has a cyclical bear market and a cyclical bull market, including six total market phases. The cyclical bear market has four phases, and the cyclical bull market has two phases.

The above chart shows two market cycles with six phases, each within the secular bear market of 1966 to 1982.

This period is the longest, taking at least six years, as the secular bear is in its final phase, setting the stage for another new bull market. The market then consolidates to sort out the problem. This is an opportunistic and selective market phase with slow economic growth; the market rewards some sectors over others. At the end of this phase, the market confirms a new secular bull market. Investors examine this phase for the catalysts that could end the secular bear market's trading range pattern.

In 1945 after World War II, the United States worked to rebuild European infrastructures, beginning to export products and services. This catalyst helped the U.S. economy expand and the market to break away from the secular bear market.

In 1978 technology innovations, mergers and acquisitions, and the Baby Boomers' entrepreneurial minds helped the market break away from the sixteen-year secular bear market.

In late 2020 we will be looking for globalization particularly in emerging markets, the Internet, and alternative energy innovations to lead the U.S. out of the current secular bear market. It will take a few more years after 2010 for the developed world and emerging countries to work out their problems and for the new technology to be adopted. The old technology will be replaced by the new innovations in all aspects of life, stimulating global demand.

We know from historical patterns that it takes 16 to 18 years for the secular bear market to end. The good news is we have put the most volatile ten years behind us. The coming years will be less volatile than previously seen, and we are unlikely to see new lows in the NYSE index from 2010 to 2021. In order to beat the market, one needs to be more opportunistic and selective in investments.

(Continues...)



Excerpted from Tactical Management in the Secular Bear Market by Tahar Mjigal Copyright © 2010 by Tahar Mjigal . Excerpted by permission of AuthorHouse. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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