Before I get squeezed out of my calling for a correction position, I like to share the chart that I think paints a clear picture of how a secular bear market will look, feel, smell, and taste. Just by looking at it, it looks dizzying, scary, smells bad and tastes awful. How about that? I just egged everyone to take a vacation for the next 15 years. The Japanese did it, so can you.
The chart shows a big 500 point range that in that time was pretty large. The rally that we had this year only confirms that such rallies usually do happen in secular bear markets more than in secular bull markets.
Dissecting the chart, you will see that the during the first half from 1965 to 1974, peak to trough ranges widen. Such is a characteristic of tops or bottoms as this first half shows lack of control from either the bull camp or the bear camp. This means bulls wait for better prices. Weak handed buyers or bargain hunters get flushed out as soon as prices go to new lows. Strong hands or real bulls take advantage of the prices and thus creating a support at the new low. From the chart, you can see this on the second low in 1969. Then as prices rally, momentum traders get sucked in at the high squeezing early shorters causing a high that widens the range. The chart shows a 66% rally that is wider than the 33% of the first range. Then, buying confidence falters again and bargain hunters get clobbered again as real buyers wait for better prices causing another new low in 1974. In hindsight, this is the final low.
Proceeding to the second half of the chart, you will see that from the 1974 final low, another powerful rally ensues that is early met by bears causing the third peak in 1976. Going into the fourth trough, something unexpected (or maybe it is expected as it is possible that headline news about the economy becomes positive) happens. The bulls are early. They create a higher low that against the great bears form a consolidation that makes a false breakdown in 1979. It is not shown in this chart but another higher low was created in 1983 before the secular bull started.
In summary, during the first part of this debacle neither the bulls nor the bears are in control. But on the second half, bulls take control of the major troughs making higher lows causing ranges to tighten, a set up for the following secular bull market.
This is why the case for another correction is compelling. As long as the economic conditions do not improve and sort out their excesses, major stock market rallies happen but is never sustainable.
Now how do we invest in this possible upcoming doldrums? The only clear way that I can see to navigate through this is by first deciding to shorten our investing universe. Shortening the list is essential to investing success because the liquidity and leveraging that we had for the last 30 years do not exist anymore. I know that this is like saying momentum traders had been successful because of the enormous leverage that was available then. I truly believe that leverage is partly the cause of successful momentum trading. By increased leverage, the trading universe became bigger. All sorts of assets went up. Now that leverage will not be the same anymore, investors need to shorten their list.
By shortening the list, the investor of the next decade must determine the most compelling megatrends of the next ten years. Why so? This is because a weak economy lacks the broad opportunities that a strong economy has. And because only few megatrends have tailwinds that keep it in a more resilient path than that taken by a weak economy, investing opportunities are shortened.
Here is a top of head list of megatrends:
- Stop-gap to alternative energy
a) Electricity demand management (ENOC, COMV)
b) Carbon capture (SSL)
c) Coal to liquid gas (China Shenhua Energy hk:1088)
d) Smart grids (PWR)
