The Three Phases Of A Bull Market
Bull Market Case Studies
Secular bull markets tend to span long periods of time. Long stock bulls can last upwards of 20 years, while commodity bull markets seem to reach a limit at around 10 years, presumably since that’s about how long it takes to bring about massive new supply which overwhelms existing demand. The oil bull of 1998 to 2008 is a good example of this. Rising prices into the mid 2000’s incentivized development of new oil supply which met demand by 2008. Since then we have been in a secular bear market in oil. In the below examples we can see how full secular bull markets can be broken down into three separate phases.
In 1949 the public was uninterested in the stock market. Daily volume averaged less than one million shares. The general consensus was the long expected postwar depression had arrived. It was in this fearful depressing atmosphere that the greatest bull market to date was born. Through three recessions , war scares, through Korea, Suez, Lebanon, Eisenhower’s heart attack, Sputnik the market climbed the wall of worry and the averages surged upward. Finally, in early 1956 the market seemed to peak and over the next year put in a triple top. It then underwent a devastating secondary reaction lasting 3 months. This convinced the majority of market opinion that the bull was over. However there was a young independent market observer by the name of Richard Russell who noted that the market had not yet shown characteristics of a phase III. Instead the market had been busy climbing the wall of worry and hadn’t had time to become manic yet. He therefore made a market call that one should buy the correction and hold on and wait for the phase III. His career took off from there.
This epic bull market has clean and obvious separation between the 3 phases. William P. Hamilton called the end of the preceding bear on September 18th 1921, 6 points from the bottom. He stated that the stock market was acting as if there were better things in sight and he declared the beginning of the great bull market of the 1920’s. The initial phase I accumulation was met with normal skepticism yet motored higher for one year before putting in a major decline. A 7 month 20 % bear market provided the transition between phase I and II. The market then provided a gift it seldom extends. It offered the fabled “gentleman’s entry”. You can see in June 1924 it successfully retested its previous low signaling it was alright to get back into the water- unusual indeed.
Scores of wonderful books have been written about this epic bull market; my personal favorite is Rainbow’s End by Maury Klein. He gives the reader the feel of just how crazy it got in that final phase III.
This is what I regard as the End of Empire Mega Bull as it finished up its insane blow off phase III at the time the USA empire peaked in the year 2000. This is the one I watched intently from beginning to end. I clearly remember the week it launched in August 1982, it was ever so powerful of a launch yet one would believe it. Once the blast off occurred there was absolutely no gentleman entry. It simply never looked back. It never ran out of juice for an entire 17 months. If you didn’t just close your eyes and buy you never had a chance to get in. I have recently gone back and reviewed market commentary from this time period and seasoned newsletter writers were scared to death to buy this market and they got stuck on the sidelines. Kinda reminds me of today's gold bugs.
After the impressive broad rally of almost 2 years the market finally entered a mini bear market of -20% lasting 7 months. Very typical and consistent with our other secular bulls that we have reviewed. If you had missed the accumulation phase it was now time to get on as the market climbed the wall of worry. For the next 3 years the market made its ascent with not even a 10% pullback. This is not desirable, as when a market goes that long with out a correction it sets itself up to correct all at once. This was the set-up for the the crash of 87.
Saddam’s incursion into Kuwait was the catalyst for the next mini bear market, but the market smelled victory in the first gulf war by October and discounted the victory ahead of time. By 1995 the market had been in a secular bull market for 13 years and it began to take on a character change. Note how once the market passed 4000 its angle of ascent changed permanently. This was the start of the roaring 90’s. I find it difficult to definitively classify when phase III actually began on a chart. After 1995 the market progressively gained steam. It began displaying Phase III characteristics in 1996. and by 1997 the uncontrolled tech boom was full on. I recall a workmate of mine getting cleaned out in April 1997 (notice minor blip) because he let his broker put his entire account into new issue tech stocks. These were the “cats and dogs” that start to fly in a phase III. So by 1997 I would consider the market in phase III, however after LTCM in October 1998 when Greenspan “rescued” the market with the LTCM bailout and Y2K juice it entered an accelerated Phase III. This was in my view even a greater mania than the 1929 market. It became more than just a “New Era” it became a religion. If you were not in it, you weren’t just stupid, you were an infidel.
Japan’s super bull began by announcing Japan’s entry as a world manufacturer and ended in a credit fueled, real estate driven insane blow out. Their post bubble adaptation of Keynesian policies has insured they remain mired in a debt trap to this day 26 years later. The beginning of this bull had all the elements any savvy market operator could wish for. A double bottom followed by a launch into a 7 month surge. This move was rapidly corrected back down to its break out point where it held at support. The market then offered the rare “gentleman’s entry”…an obvious no-brainer entry point, granted to latecomers. Once offered, the market then zoomed up a correction free 250% within the next 14 months. It now paused to rest and delivered a pounding 40% bear market over the next 2 years. This bear served to separate phase I with phase II.