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The Balenthiran Stock Market Cycle

Cover of  by Kerry Balenthiran

With stock markets around the world at or near all time highs it is tempting to think that we are in a new stocks bull market. But was 2009 the start of a new secular stocks bull market? Are we really about to say goodbye to Dow 14,000 forever? How can we tell?

These are the questions that I set out to answer when I started to study historic stock market cycles. It comes as a surprise to most people to find out that booms and busts occur surprisingly regularly and that there is a repeating cycle in the stock markets.

Just because stock markets are making new highs does not mean we are in a new long term bull market. In fact during the bear market of 1965 to 1982, the Dow made new all-time highs in 1972 and then promptly fell 45%. So new highs are not necessarily an indication of a new bull market.

My research has identified the existence of a regular 17.6 year stock market cycle consisting of increments of 2.2 years that correspond to major cyclical stock market turning points such as 1929, 1974, 1987, 2000, 2007, 2009 and beyond. I have called this cycle the Balenthiran Cycle and that is the subject of my book The 17.6 Year Stock Market Cycle: Connecting the Panics Of 1929, 1987, 2000 and 2007, published by Harriman House.

By studying stock market data going back 100 years I have been able to extrapolate the cycle forwards to provide a market roadmap stretching out to 2053 which outlines the changing character of the stock market through the different phases of the secular 17.6 year stock market cycle (secular bear market phases shown above).

Using this cycle I forecast that 2013 is likely to see a significant stock market correction that will provide a fantastic opportunity to buy into equity markets ahead of the next great bull market. The current long term bear market in stocks is likely to continue until 2018, but after that we should see another period where equity investment comes back in vogue and buy and hold rules again, just like the period from 1982 to 2000.

As major world wide stock markets reach multi-year highs and the media is full of articles stating that a new bull market is underway, it is worth remembering that, as we are all aware, stock markets do not go up in a straight line. Investors tend to forget that big falls occur when they least expect them.

The tendency to expect outsized returns to continue, aka greed, means that people tend to ignore the warning signs and are unprepared for the inevitable change in trend that occurs. This happens on the way down as well as up. By being aware of long term secular cycles as well as the intermediate cyclical turning points investors will be better equipped to ensure that they have the right strategy for the prevailing stock market conditions.

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