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OUTSIDE THE BOX: Determining Secular or Cyclical Market Biases
By Jeff Neal, Optionetics.com
6/23/2004 7:45:00 AM

http://www.optionetics.com/articles/article_full.asp?idNo=10601

One of the biggest challenges an investor faces is to try to determine if the market is currently bullish or bearish. Is it long-term bullish and short-term bearish or vice versa? What about the intermediate trend—is it bullish or bearish? In addition, the investor has to also discern whether the particular market bias is secular in nature or cyclical. It can get confusing at times, however with some conceptual explanations hopefully getting a read on the latest market conditions can at least be made a bit simpler.

In general a bull market is described as an extended period of rising prices whether it be in an individual stock, group of stocks, or the market as a whole. However, because security prices are often subject to reversals, it is sometimes difficult to know whether there has been a temporary correction in or a permanent end to the bull market. This is why the opinion of whether a bull market is actually in progress is often subject to individual interpretation.

A bear market on the other hand is characterized by an extended period of general price declines in an individual stock, group of stocks, or the market as a whole. However, even in a widespread bear market it is possible to have bull markets in particular stocks or groups of stocks. For example, stocks of gold related companies often move against the prevailing trend in the equities market.

This brings us to the distinction between secular bull and bear markets versus cyclical bull and bear markets. A secular bull or bear market is one that can be consistently measured over a long period of time like decades. A historical example of a secular bull market is from 1982 to 2000 when the Dow Jones Industrial Average surged more than 1,400 percent over that time period. A secular bear market was experienced from the 1966 to 1982 time frame. During this period stocks declined as well as trading sideways which is typical of a secular bear market.

On the other hand cyclical bull and bear markets occur over much smaller time periods anywhere from several months to a couple of years. Typically a cyclical market or stock is highly dependent on the cyclical changes in general economic activity. As investors anticipate changes in profits, cyclical stocks often reach their high and low levels before the respective highs and lows in the economy.

The challenge for investors is identifying just what type of market environment we are experiencing. For example, are we in a bear market rally or is it the beginning of a long-term bull market? The downside risk of course could wipe out any gains achieved previously by catching investors by surprise with a major decline in equity prices. On the other hand, if investors strongly believe we are in a long-term bear market they will totally miss out on the cyclical bull market rallies leaving a lot of potential profits on the table. As history has so clearly pointed out minibull markets embedded in multiyear bear markets are not uncommon. Conversely, minibear markets can often occur within multiyear bull markets.

Defining just what kind of market we are experiencing is a constant challenge to the investor. Many times it is just not clear. However, one can still develop a market bias and participate in the markets if you stay hedged. By hedging you reduce your risk exposure dramatically and it also allows you to more easily adjust your positions as the market dictates.

Happy Trading.


Jeff Neal
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
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