With major equity markets either at, or close to, all time highs, there is a temptation to think that the recent turmoil is behind us and that we are once again in the midst of a bull market in stocks. In a fascinating new book ? ?The 17.6 Year Stock Market Cycle: Connecting the Panics of 1929, 1987, 2000 and 2007? ? author Kerry Balenthiran outlines the terms of his own market cycle and explains why we will see the long-term bear market reassert itself during 2013.
Boom and busts occur much more frequently than many imagine and by studying historic stock market cycles we can learn a lot about their expected duration and also what to expect along the way.
As Balenthiran writes, researchers have been making attempts to understand these cycles for many years. In the late 1800s/early 1900s businessmen and scientists such as Joseph Kitchin, William Stanley Jevons, John Mills, Clement Juglar and Nikolai Kondratieff, to name a few, started to formulate theories about recurring business cycles of various lengths and established the concept of the business cycle.
Interest in cycles among private traders wanes during the boom times (?Who cares, I am making money?) only to resurface during prolonged corrections, as economists and traders alike seek to understand why the usual short sharp recession has not been followed by a recovery. This was true in the 1930s and is the case once again now. This explains why Balenthiran has picked this moment to write his book and why the case he makes strikes a chord in 2013.
The cycle established here is not completely original or unique. Art Cashin at UBS bank mentioned a 17.6 year stock market cycle in an interview with CNBC and also he mentioned why he believed the bear market would last until 2017. Steven Williams from CyclePro Outlook has also written about the 17.6 year stock market cycle. However, the usefulness of Balenthiran?s work is that it adds weight to the case already made by these gentlemen. With further independent research ? conducted without knowing about Art Cashin and Steven Williams ? Balenthiran also identified the presence of this 17.6 year cycle and so the plausibility of its existence seems more credible. Balenthiran himself says that when I heard about the work of Cashin and Williams he found it incredible that three people could independently identify such a specific cycle.
The cycle in this book is taken a step further, however, as it shows the regular 17.6 year stock market cycle to consist of increments of 2.2 years that correspond to major cyclical stock market turning points such as 1929, 1987, 2000 and 2007 and beyond. This is what the author modestly refers to as ?the Balenthiran? cycle.
By studying stock market data going back 100 years Balenthiran has 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 17.6 year stock market cycle.
Using the Balenthiran Cycle he forecasts 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 he says we should see another period where equity investment comes back in vogue and buy and hold rules again, just like from 1982 to 2000.
As major world wide stock markets hover around 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. Traders 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 traders will be better equipped to ensure that they have the right strategy for the prevailing stock market conditions.
?The 17.6 Year Stock Market Cycle? is an interesting and useful book because, though you may not agree with everything in the author?s argument, it provides an additional piece of ammunition for traders as they approach the market. Balenthiran has grounded his cycle in sound business logic and it does seem plausible. As with any theory about market behaviour it is unlikely to be 100% correct but the author does not hold it up to be so; rather the waves of the cycle are intended to complement traders? other analyses.
