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Looking for the Bear in the Bull Market

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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When discussing bull and bear markets, it sometimes helps to think of them as coming in two distinct flavors: Short-term cyclical markets and long-term secular ones. Knowing one from the other isn't always easy.

A number of  veteran market observers such as Raymond James's Jeffrey Saut, technician Ralph Acampora, strategist Laszlo Birinyi and market historians Jeff and Yale Hirsch have made the argument that U.S. markets in 2013 entered a new secular bull market, much like the one that began in 1982. The 1982 secular bull market was preceded and followed by secular bear markets that featured lots of sharp rallies and sell offs, but netted investors nothing after more than a decade. Long-term secular markets tend to be driven by earnings, valuations and trend.

Others, such as Douglas Ramsey of Leuthold Weeden Capital Management or Joseph Calhoun of Alhambra Investment Partners, disagree. They either find the data inconclusive if this is a secular market of any kind, or believe valuations don't suggest typical secular-market returns. In other words, the stock-market gains since 2009 might represent nothing more than a big cyclical bull-market rally.

Cyclical markets, which often follow the business cycle, are shorter in duration and can move in opposition to the broader trend. They are driven by a variety of forces, but we very often see technical indicators, investor sentiment and Federal Reserve policy as crucial influences. BofA Merrill Lynch Global Research defines a cyclical bull market as “a rally of at least 20% without a 20% correction using daily closing basis S&P 500 data.”

Stephen Suttmeier of BofA Merrill Lynch likes to line up the generational lows (1942, 1974, and 2009) as a way to compare secular markets across history. As you can see in the chart below, looking at markets this way suggests we are still "within the early innings of the SECULAR bull market signaled on the April 2013 breakout in the S&P 500,” Suttmeir wrote in a research note to clients this week.  (Emphasis in original.)  

Suttmeier does see a risk of a cyclical bear market, though one that is short and relatively shallow. The average cyclical bear market going back to 1929, according to Suttmeier, lasts 10 months and leads to a decline of 35.4 percent. However, these shorter cyclical bear markets tend to be less severe during secular bull markets. In other words, if we experience a modest bear-market cycle this year within the longer bull market he wouldn't be surprised.

(Corrects third paragraph of column published March 20 to cite Douglas Ramsey, chief investment officer of Leuthold Weeden, not Steven Leuthold, who has retired.)

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Barry L Ritholtz at

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