Ned Davis on Secular vs. Cyclical Bull Markets

Mark Hulbert looks at the question of whether this is a once-in-a-generation stock market low (secular bull market)  or a mere “cyclical” low.

To figure out which, he looks to Ned Davis of Ned Davis Research.  NDR  identified seven factors to determine if any given market low is a secular low, setting up the next lasting Bull Market.

The Seven Factors: There should be:

1. Money, cheap and amply available;
2. Debt structure that’s been deflated;
3. Large pent-up demand for goods and services;
4. Stocks that are clearly cheap;
5. Investors who are deeply pessimistic;
6. Major investor groups with below-average stock holdings;
7. Fully oversold, longer-term market conditions.

Looking at these elements, how does this cycle measure ?

1. Cheap MoneyNeutral. You might think that this factor should be rated as “bullish,” given how accommodative the Federal Reserve is currently. But Davis notes that banks are also significantly tightening their lending standards. Given the heavy load of debt under which both consumers as well as corporations suffer (see next criterion), banks are finding it “increasingly hard to find ‘credit-worthy’ borrowers.”

2. Debt structure deflated? Bearish. This is the most negative of any of Davis’ seven dimensions, since by no means is the debt structure deflated. On the contrary, Davis calculates that the total credit-market debt load right now is nearly four times the size of gross domestic product, and that it takes more than $6 of new debt for our country to produce just $1 of GDP growth. That’s almost double the amount of debt required in the 1990s.

3. Pent-up demand? Bearish. Davis acknowledges that there has been improvement along this dimension from where things stood at the beginning of the bear market. But he is particularly worried by the ratio of total Personal Consumption Expenditures to Non-Residential Fixed Investment, which currently stands at a record high. At the secular bear market low in 1982, in contrast, this ratio was at a record low.

4. Cheap Stocks? Neutral. Though the stock market “got undervalued at the March lows,” it never became “dirt cheap.”

5.  Sentiment? Bullish. Davis says that past secular market lows were accompanied by an extreme amount of pessimism, and his indicators show a similar extreme existed earlier this year.

6. Stock vs cash reservesNeutral. While foreign investors have record-low stock holdings, according to Davis, household holdings — while low — are not nearly as low as they were at prior secular bear market lows. And institutional investors’ stock holdings “are only down to an average weighting historically.”

7. Oversold longer-term market condition? Neutral. Davis believes that, though many of the excesses of the real-estate bubble have been worked off, some still exist. That’s particularly a problem, he says, given that the stock market bubble of the late 1990s never completely deflated either. “As we saw in Japan after 1990, a double-bubble in stocks and real estate leaves it difficult to put ‘humpty dumpty’ together again.”

According to Davis, there is but one of the seven foundations of a major secular bull market in place. Three are neutral, three are bearish.

Conclusion This is a Cyclical Bull market . . .


Secular bear, cyclical bull
Mark Hulbert
MarketWatch Jul 30, 2009, 12:01 a.m. EST

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