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Here is what I have been hearing the last few days and weeks:
This is an aging bull market.
We are entering a bear market.
In my opinion, we are in the late stages of the bear market, which began with the blow-off top in March 2000. I guess it's all how you define bull and bear markets. Some might define a 20% move up off a bottom as a bull market and a 20% move down from a top as a bear market.
Let's take a look at some historical data. Below is the annual price change in the S&P 500 from data that I have collected over many years:
YEAR
S&P500
YEAR (cont.)
S&P500
1950
22.63%
1978
1.06%
1951
16.35%
1979
12.31%
1952
11.78%
1980
25.77%
1953
-6.62%
1981
-9.73%
1954
45.02%
1982
14.76%
1955
26.40%
1983
17.27%
1956
2.62%
1984
1.40%
1957
-14.31%
1985
26.33%
1958
38.06%
1986
14.62%
1959
8.48%
1987
2.03%
1960
-2.97%
1988
12.40%
1961
23.13%
1989
27.25%
1962
-11.81%
1990
-6.56%
1963
18.89%
1991
26.31%
1964
12.97%
1992
4.46%
1965
9.06%
1993
7.06%
1966
-13.09%
1994
-1.54%
1967
20.09%
1995
34.11%
1968
7.66%
1996
20.26%
1969
-11.36%
1997
31.01%
1970
0.10%
1998
26.67%
1971
10.79%
1999
19.53%
1972
15.63%
2000
-10.14%
1973
-17.37%
2001
-13.04%
1974
-29.72%
2002
-23.37%
1975
31.55%
2003
26.38%
1976
19.15%
2004
8.99%
1977
-11.50%
2005
3.00%
AVERAGE
9.29%
STD DEVIATION
16.49%
YEAR
SPX
SPX
SPX
SPX
MARKET
MEAN
MEAN
MEAN + 1 STD
MEAN - 1 STD
1950
1
0
0
0
BULL
1951
1
0
0
0
BULL
1952
1
0
0
0
BULL
1953
0
1
0
0
COUNTER
1954
1
0
1
0
BULL
1955
1
0
1
0
BULL
1956
0
1
0
0
TRANS
1957
0
1
0
1
BEAR
1958
1
0
1
0
COUNTER
1959
0
1
0
0
BEAR
1960
0
1
0
0
BEAR
1961
1
0
0
0
COUNTER
1962
0
1
0
1
BEAR
1963
1
0
0
0
TRANS
1964
1
0
0
0
BULL
1965
0
1
0
0
TRANS
1966
0
1
0
1
BEAR
1967
1
0
0
0
COUNTER
1968
0
1
0
0
BEAR
1969
0
1
0
1
BEAR
1970
0
1
0
0
BEAR
1971
1
0
0
0
TRANS
1972
1
0
0
0
BULL
1973
0
1
0
1
TRANS
1974
0
1
0
1
BEAR
1975
1
0
1
0
TRANS
1976
1
0
0
0
BULL
1977
0
1
0
1
TRANS
1978
0
1
0
0
BEAR
1979
1
0
0
0
TRANS
1980
1
0
0
0
BULL
1981
0
1
0
1
COUNTER
1982
1
0
0
0
BULL
1983
1
0
0
0
BULL
1984
0
1
0
0
COUNTER
1985
1
0
1
0
BULL
1986
1
0
0
0
BULL
1987
0
1
0
0
COUNTER
1988
1
0
0
0
BULL
1989
1
0
1
0
BULL
1990
0
1
0
0
COUNTER
1991
1
0
1
0
BULL
1992
0
1
0
0
TRANS
1993
0
1
0
0
BEAR
1994
0
1
0
0
BEAR
1995
1
0
1
0
TRANS
1996
1
0
0
0
BULL
1997
1
0
1
0
BULL
1998
1
0
1
0
BULL
1999
1
0
0
0
BULL
2000
0
1
0
1
TRANS
2001
0
1
0
1
BEAR
2002
0
1
0
1
BEAR
2003
1
0
1
0
COUNTER
2004
0
1
0
0
BEAR
2005
0
1
0
0
BEAR
TOTAL
29
27
11
11
STD DEVIATION
16.49%
NOTE: 1 = YES; 0 = NO
These data raise some interesting questions and observations:
The SPX is up on average 9.29% (simple average, not compounded).
For 29 out of 56 years, the SPX was up at least the average amount. This leaves 27 years of below-average results.
There were 11 times that the SPX outperformed greater than one standard deviation over the mean return.
There were 11 times the SPX performed worse than one standard deviation below the mean return.
We can thus conclude in a simplistic manner that the return on the SPX is normally distributed around its mean return of 9.29%.
Beyond Binary
So, what's a bull market? What's a bear market? Typically, a positive return is bullish, and a negative return is bearish. Do we have to be so shortsighted to declare a bull or bear market in such a binary way? This does not account for alpha in the definition of bull and bear market. If the expected return of the SPX is 9.29%, then can we define a bull and bear market around that mean to account for expected alpha? Let me try to develop a definition:
If the SPX produces returns above the mean in three of the prior four years, including the current one, then we would have a bull market.
If the SPX produces returns below the mean in three of the prior four years, including the current one, then we would have a bear market.
If the SPX produces returns above the mean in two of the prior three years, including the current one, which is greater than one standard deviation above the mean, then we would have a bull market.
If the SPX produces returns below the mean in two of the prior three years, including the current one, which is greater than one standard deviation below the mean, then we would have a bear market.
If the SPX produces returns above the mean in two consecutive years, then we would have a bull market.
If the SPX produces returns below the mean in two consecutive years, then we would have a bear market.
If no condition applies, then we are in a countertrend or transitory market -- neither the bear nor bull moniker would be apropos. It is hard to define the market until after we see the longer-term bias. These years are pivotal but may at times be confusing, such as the 1957-to-1962 period, because of the strong countertrend rallies.
Absolute and Relative
Now, according to these definitions, one can be an absolute bull but also be a relative or alpha bear. I think the latter is more substantive in managing active portfolios.
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At the time of publication, Rothbort was long SPY, although positions can change at any time.
Scott Rothbort has 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers both individually managed accounts and a hedge fund to its clientele. Prior to that, Rothbort worked at Merrill Lynch for 10 years.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is an adjunct professor for the Stillman School of Business at Seton Hall University.
He appreciates your feedback; click here to send him an email.
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