DeBuse wrote that the first and the fourth periods of a bull market are “a blending of the bull and bear cycles and are more difficult to spot.” He stated that the second and third periods are “relatively” easy to identify. Well, let’s see …
Period Two
In the second period, “ … stock prices have been rising for several months … Market leading equities are beginning to violate their 200-day moving averages… you can pretty much select any stock and it will appreciate … Now there is competition by the public for a reduced supply, and accumulation is forcing prices higher … However, the larger public does not join the party just yet … Mutual fund inflows are increasing … The Dow Jones Transportation Index clearly reverses … The conclusion of this period is often marked by a significant retracement …”
Period Three
In the third period, “… stock prices advance at a phenomenal rate … little attention is paid to the underlying fundamentals of the larger market … P/E ratios begin to achieve even higher levels … an initial public offering (IPO) craze hits the market … a plethora of new companies are formed … merger mania also develops and buy-outs run rampant … the professionals start to distribute some of the shares that were acquired in period one.”
Period Four
The fourth period is a dissolution of the market trend, leading to “… the coming market collapse … [It] is rife with conflict and confusion … uneducated speculating and unrestrained leverage … culminate into an obvious bubble … Clowns are driving the bus.”
Clearly, the fall of 2008 was the definitive end of period four of the last bull market. Easy enough, but as an investor or trader, how does identifying the periods help with finding trades, given that the average bull market historically lasts “forty months and three weeks?” Given DeBuse’s defined characteristics of each period in a bull, market, can anyone actually say for sure which period we are in now?
As I said when I started this review of his article, the historical perspective interests me, and, I believe it is helpful to understanding both the really big picture and the current market context. The problem is, as we are seeing now, the characteristics from each period tend to blend. In other words, even though the end of period four of the last bull market is easily identified, one can find elements of periods 1-3 in the current bull rally we have seen since March 2009. So, then, where exactly are we in this bull market?
I enjoyed DeBuse’s analysis, and I appreciate his effort and intent. Such perspectives serve investors and traders well. However, as DeBuse himself wrote, “these periods are often difficult to define clearly … the cycles never change from black to white or white to black, but rather evolve in stages of gray.” So, then, defining precisely where we are in a bull market is irrelevant. Simply understanding that we are in one and tracking the elements of the big picture in a small frame is far more advantageous in finding trades that will make us money.
Trade in the day; invest in your life …
