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Historical Perspective On Bull Markets

07/30/12 11:52:28 AM
by Billy Williams

A major bull run may form in the next six to 18 months, and you need three things to succeed.

Security:   SPX
Position:   Hold

The market is whipsawing back and forth, with traders caught in the middle like some hapless ship caught in a storm at sea being thrashed about in the middle of nowhere. Somehow, your skill as a trader as well as your personal courage will help you navigate your way through this storm and help you reach safe harbor.

In the meantime, it's times like these that can make or break a trader.
How can you work through all this negative news and spin cycle of disappointing earnings/economic news and on to the path of solid profits?

The best starting point is to begin with yourself, specifically with your beliefs about the market followed by your objectives. Like two sides of a coin where each side is fundamental to the whole, your beliefs about the market and your objective are 50% of the outcome that you hope to achieve. See Figures 1 and 2.

FIGURE 1: S&P 500. The market was stuck in an 11-year trading range back in the 1980s until if finally broke out.
Graphic provided by:
If you believe that the market is too dangerous a place right now with all that is going on -- Greek debt crisis, the EU in danger of breaking up, the derivative market breaking down and taking the global market with it -- then you're probably better off putting your money in an interest-bearing account, or if you're really terrified, place it under your mattress at home. At least, maybe consider buying gold and silver coins to hedge against a global economic and currency implosion.

However, the other side of that equation is that the market's volatility coupled with the unknown factor of how everything is going to play out offers you many opportunities as new trends emerge just as the old ones die out.

As for objectives, the outcome you desire will have a lot to do on how you approach the market. If you are looking for steady, reliable returns without much risk, there are several Morningstar five-star rated bond funds to select that have solid 8% annual returns over the last decade or longer. If you want 20% or more returns, then the equity market has a great deal to offer but with more risk.

FIGURE 2: S&P 500. Afterward, for almost 20 years, the market trended higher until 1999, where it entered a period of contraction. Now, the market is inching higher and the potential for another secular bull run begins to form once more.
Graphic provided by:
The latter objective requires a strategy, an approach to trading or investing in the market to protect your downside by having the ideal setup conditions for you to enter the market.

That said, it is easy to become disheartened in the current correction that exists within a secular bear market that has lasted for almost 13 years just as you find yourself in the middle of the Great Recession that just won't seem to end.

For the trader who still seeks more from the market and greater returns in the market's current context, it would help to gain an historical perspective. The last such contracted price range that the stock market found itself in was the 1970s and lasted for almost 11 years. The whole decade was a malaise of bad news and poor economic growth which, for America, was a proverbial "lost decade" due to government meddling and the private sector floundering one opportunity after another for a myriad of reasons.

But the market recovered enough strength in order to break higher followed by economic expansion that lasted almost 20 years. Now, the market is on the cusp of another potential breakout and it's important that you don't allow yourself to be worn down by recent events.

In the next six to 18 months, the markets may be in a position to finally break free of the confines of a decade-plus trading range it has been imprisoned by, and the full fury of a stock market may be finally unbound and rocket higher, led by the strongest stock leaders available.

For now, prepare by checking your beliefs and objectives to make sure that they are aligned with the right trading approach to meet your goals and be ready.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

E-mail address:

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Date: 08/08/12Rank: 3Comment: The sentence about government meddling set me to thinking. I remember the 70s. Cars got 10 miles per gallon, OPEC doubled or quadrupled the price of oil, there were lines of cars around the block waiting for their share of gas. That caused the malaise, not government meddling . Our country ran on cheap, abundant oil. It was after that time that we became more energy efficient; oh, with prodding from meddling government. Why do we forget all about those things when it is politically convenient?

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