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Special Report:    A Sneak Peek at the Next Bear Market in Stocks

Bull Markets Originating From Second-Year Lows

1932-1937: At its June 1, 1932 Great Depression stock market low, the S&P was down 86%. The Dow Industrials would lose 89% in their descent from a September 1929 top to the July 1932 trough. The magnitude of these declines exceeds even the respective 83% and 78% drubbings suffered by the NASDAQ 100 and NASDAQ Composite indices between March 2000 and October 2002 after the unraveling of the tech-stock frenzy. In all cases, the averages required between 2 years, 6 months and about 2 years, 10 months to hit bottom. Interestingly, after the other great speculative mania to sweep a developed economy – Tokyo’s explosive stock and land boom of the 1980s – Japan’s Nikkei Dow collapsed for nearly 2 years and 8 months before launching a massive rally in August 1992, the 2 nd year of the decade.

The Nikkei attained its highest subsequent point during a bear market rally in – you guessed it – 1996, but continued to slide until 2003, over 12 years after its final peak. In its fateful last leg up in the summer of 1929, the Dow Jones Utility Average outgained the Industrials 2-to-1, but then also tumbled for between 12 and 13 years. With the once red-hot NASDAQ still a lot closer to its low than to its high, that’s something to bear in mind going forward.

1942-46: As since 2002, the DJIA significantly lagged the S&P, and broader averages left both blue-chip benchmarks in the dust during this 4-year advance. Commodity prices started a sustained rise in late 1939, just as they did near the end of the last decade, on the eve of the outbreak of World War II. The secular bond market bull of 1920-1946 carried interest rates to a historic low on January 26, 1946. This year, as in 1946 (60-Year Cycle), bonds turned lower from a late-January high after more than 20 years of declining long-term interest rates. A January 18, 2006 bond market peak was preceded by a double bottom in long rates in June 2003 and June 2005. With a 22-year fall in long-term rates from the record levels of 1981 seemingly behind us, the 10-year Treasury bond yield continued to hit new 4-year highs into early summer.

1962-66: This was easily the most restrained of the bull markets starting from 2 nd-year lows, with the S&P climbing only 80%. So far, the S&P has gained as much as 73% since October 2002. A bust in the overheated technology sector set up the 1962 low as well. Stocks like Polaroid and Avnet Electronics sold for over 100 times earnings in 1961, while IBM traded at a multiple above 80 before losing more than half its value.

1982-87: Here too, bonds went into a tailspin early in the 6 th year. Corrections in the blue chips stayed small after 1984, with no decline as great as 9% for the duration of the bull market. The largest sell-off in the S&P this year or last has been limited to 8.1%.

6th-Year Tops

1806: In the era of Lewis and Clark, U.S. exports of grain, cotton and other goods to warring European nations surge dramatically. But after Napoleon institutes the Continental System, blockading the British Isles in retaliation for a British blockade of France, the U.S. – under President Thomas Jefferson – would pass the Embargo Act of 1807, slashing American exports 80% in 1808 and leading to depression.

January 19, 1906: A metals mania gripped Wall Street. Stocks like U.S. Cast Iron Pipe and National Lead rocketed nearly 800% in the 1903-06 bull market. U.S. Steel more than quintupled after sagging to a low of 8-3/8 in May 1904 when it eliminated its dividend. Copper prices went ballistic, thanks to escalating demand from rapidly expanding electric utilities. Over half the issues in what was then an early 12-stock incarnation of the DJIA were metals-related, including American Smelting and Amalgamated Copper, and they propelled the average above a nominal level of 100 for the first time, to a final top of 103. In its current bull market from a November 2001 low, copper, aided by burgeoning industrialization demand from China’s fast-growing economy, has nearly septupled, surging as much as 153% above its former all-time high of 164.75 cents/lb. Year-to-date through August 15, 2006, steel (up 34.21%) ranks as the best-performing industry group, according to Dow Jones & Company, despite a vicious May-June correction. Over the past year, steel stocks gained over 52%, while the industrial metals sector – including steel, aluminum and nonferrous metals – tacked on 32%. Steel stocks are up a whopping 278% in the last 3 years.

November 21, 1916: America got rich supplying the Allies. Commodity producers, including copper stocks, were again big winners. Bethlehem Steel shares soared from 29, when World War I broke out at the end of July 1914, to 700. Premier sugar stocks went up 600% or more. Sugar prices early in 2006 climbed to their highest levels since 1981.

May 29, 1946: As in 1985 and 2005, no serious correction took place in 1945. But a quick 10% sell-off in the blue chips in early 1946 set the stage for a final run up. Transportation stocks lagged the general market to establish their bear market low in June 1942 (the DJIA and S&P bottomed in April), only to far outdistance the blue chips in the ensuing bull market. But they were especially hard hit when the market reversed course dramatically in late 1946. The Dow Jones Transportation Average this decade failed to bottom until March 2003, 5 months behind most indices, but still has virtually doubled the S&P’s entire gain since 2002.

August 2, 1956: Surprise! Industrial metals stocks – where have we heard that before? – led a bull market that topped in a 6 th year. Aluminums were particularly strong. Transportation and oil stocks also fared well.

February 9, 1966: The U.S. first sent combat troops to Vietnam the year before. Although inflation and interest rates were poised to move seriously higher, 1966 stands as the only 6 th year in which commodity prices peaked almost simultaneously with a major stock market top. When the market entered free-fall mode during summer, the hottest stocks from the last bull campaign, as usual, burned investors the worst. In 1966, those included airlines, electronics and color TV stocks.

September 21, 1976: In 1976, the Dow clawed its way back over 1000 for the first time since 1973, but couldn’t manage to hang on for long. I know this sounds like a broken record, but steel stocks were strong, with both Bethlehem and U.S. Steel reaching 15-year highs. In the brave new world of OPEC and stratospheric (for the time) oil prices, energy stocks went wild. The steels reversed sharply lower in the face of cheap imports during 1977, but the overall bear market was abnormally mild – and didn’t affect smaller stocks at all – even though blue chips didn’t bottom until early 1978.

The more things change, the more they stay the same:    Seventh-Year Panics

Happy Trading,
James Flanagan,
President and founder of
Gann Global Financial

Take a few minutes to check out the Complete Forecasting Service:   Gann Global

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