Thursday, February 24, 2011

A Paradigm Shift in the Stock Market

Given that it’s a subscription site I do not often link to Richard Russell’s Dow Theory Letters.

I do subscribe myself and always find that Russell, who writes a new eletter every day, is interesting and provocative.

I can’t say that this is the first time he said it, but this week Russell wrote of a fundamental paradigm shift in the markets.

In the recent past we have learned to build wealth through investing. The economy grew; the markets rose; we became more wealthy. From 1982 to 2009 we lived through a great bull market. In a bull market you want to be invested, even leveraged, to the hilt.

Clearly, there is much debate about when the last bull market ended. Some will date its demise to 2007, but that does not change Russell’s view that we are currently in an extended or secular bear market.

In a secular bear market we should try to conserve wealth and not take on debt. Russell describes the new investment paradigm: “I believe that from now on, the idea will be to hang on to as much of our wealth as we can. In other words, from here on the trick will be to avoid losing money. He who loses the least will be the winner.”

In a bear market there are very, very few ways to make money, but many, many ways to lose it.

Russell lists them:
(1) Through both inflation and deflation.
(2) By owning the wrong assets at the wrong time.
(3) By trading poorly.
(4) By listening and acting on the wrong advice.
(5) By thinking you can make money (as in the old days) by remaining in the markets.
(6) By being leveraged in items that are subtly declining.
(7) Simply by being greedy, stupid or impatient.

 From the Business Insider, link here.

1 comment:

JP said...

The best website that I have been able to find on the secular (meaning more than one buisiness cycle) bull and bear market issue has been Crestmont Research over at They charted the secular markets back to 1900.

The stock market (by which I mean the S&P 500) has basically been in a trading range since 2000.

The secular bear market will probably end between 2014 and 2025.

Based on current prices, the S&P would have to trade at about 640 to allow a new secular bull market to begin.

You can adjust this number for inflation every year.