My additional research of empirical data from 1871 to 2021 has resulted in the 4 new significant discoveries which pertain to record highs, Perilous Peaks and Secular Bull market highs:
- The addition of the initial Perilous Peak, which occurred in 1881. The four S&P 500 Perilous Peaks since inception occurred in: 1881, 1929, 2000 & 2021. June of 1881 was not included in my 1/16/21 article.
- “DNA” for a Perilous Peak and development of the Extreme Analytics (EA) algorithm, which identifies Perilous Peaks.
- “Greed Accelerator”, one of the key elements of the DNA which has preceded every one of the S&P 500’s Perilous Peaks since its inception.
- 100% direct correlation between Perilous Peaks, Secular Bull market highs and the birth dates for Secular Bears.
The new discoveries corroborate the initial research findings which were covered in the 1/16/21 article which was about my discovery of Perilous Peaks. Below is an excerpt from the article:
“The differentiation of a Perilous Peak from the hundreds of record highs which occur during the lifetime of a secular bull market is a game-changing breakthrough. It guides and empowers savvy investor to know when to get out and maximizes their after-tax profits.”
The DNA discovery is arguably the most important throughout my 44-year career. It answers the haunting question which thousands of investment professionals have struggled with throughout their careers, “When will the Secular Bull market end?”.
Until this DNA was discovered, the lifespan of a mature Secular Bull was anybody’s guess. Charles Dow, the creator of the Dow Jones Index, was the first to discover that markets were secular. Prior to his death in 1900, he said “markets move like a pendulum, swinging from excessive gains to excessive losses”.
The table below contains the lifespans for all of the Secular Bull and Secular Bear markets for the Dow Jones 30 Industrials Composite Index from 1802 to 2021. All Secular Bull and Secular Bear markets for the Dow, since 1802, have had minimum lifespans of 8 years and maximum lifespans of 20 years. Because of the dizzying range of lifespans, predicting the end of a Secular Bull over the last 206 years has been an exercise in futility for all analysts and pundits. Until now.
Note: The research to discover the DNA for a Perilous Peak was conducted on the S&P 500 instead of the Dow. Since 1957, when the S&P was expanded to 500 members, the S&P index has been much more representative than the Dow.
The chart below depicts (from 1929 to 2021) the S&P 500’s Perilous Peaks, Secular Bull highs and the end for each Secular Bear. Perilous Peaks coincided with all but one of the secular bull highs.
Given the complexity of the four primary elements of the DNA, Perilous Peaks for the S&P 500 have been once-in-decades occurrences. The S&P 500’s first-ever record high, which possessed Perilous Peak DNA, was June of 1881. The second Perilous Peak occurred 48 years later in September 1929. The 2000 perilous peak occurred 71 years after 1929. The 4th January 2021 Perilous Peak occurred 21 years after the 2000 Perilous Peak.
As depicted in the table below, a Perilous Peak is followed by a devastating initial decline and then a secular bear market. Within 3 years of the 1881 Perilous Peak and Secular Bull high, the S&P 500 had declined by 29%. The 1929 and 2000 were, within 3 years, followed by declines of 86.2% and 49%, respectively. The period of time for the S&P 500 to return to a record high, after a Perilous Peak and Secular Bull high, ranged from 13 to 25 years.
Research findings indicate that in order for an S&P 500 record high to have Perilous Peak DNA always requires an entirely new generation of investors be conditioned to trade the headline-grabbing, double-digit dips with the intent of making a quick profit. The new generation must not be privy to the wisdom of experience gained from the devastation which occurred after the prior Perilous Peak. This acceleration of greed for substantial gain (based on the bravado of their recent victories in double-digit dips) is the essential gas pedal necessary for them to blindly climb to the summit of the Perilous Peak.
The experience and success that investors experience from trading double-digit corrections builds (often ill-advised) confidence, increases “teflon-esque” risk appetites, thereby; insuring complacency. According to my empirical research findings which are depicted in the charts below, after investors have been conditioned to buy the dips; they default to trading each and every double-digit correction until the strategy no longer works. Each correction and subsequent recovery embolden the investor to increase risk and speculation, the fuel which is needed for a record high in the later years of a Secular Bull to be the “Perilous Peak”. A double-digit correction followed by quick recovery to a new record high is the greed accelerator. Greed being at its highest level is mandatory for a record high to be the Perilous Peak.
The S&P 500’s annotated daily price charts from 1928 to 1932, shown below, exemplifies the role the greed accelerator plays during the germination of Perilous Peak DNA. From May to June 1928, the S&P 500 corrected by 10.2%. Within 61 days, the index completely recovered to establish a new record high. In September of 1929, the S&P 500 subsequently reached its Perilous Peak. After the index corrected by 10% in October 1929, the S&P 500 attempted to rally as it had done in 1928. Instead of getting back to a new high within the preestablished 61 days, the S&P 500 continued lower to a decline of 44% by November of 1929.
The chart below depicts that after mounting a feeble rally from its November 1929 low, the S&P 500 continued down. By June of 1932 the index had declined by 86.2% from its September 1929 high.
The S&P 500’s annotated price charts covering 1998 to 2002, shown below, represents another example of the “setup role”, played by greed accelerators. From July 1998 to August 1998, the S&P 500 declined by 19.3%. Within 90 days, the index recovered to a new record high. In July 1999, one year later, the index experienced yet another double-digit decline. Within 87 days, the index recovered back to a new record high. After the S&P 500 corrected by 11.2% from March to April 2000, the attempt by the index to rally back to above the most recent record high, within the previously established 90-day time period failed.
Instead, as depicted in the chart below the S&P 500 by October 2002 had declined by 49%.
The evidence from my research findings is irrefutable. The S&P 500’s failure to get back to a record high within the preestablished time period after each of the Perilous Peak had occurred confirmed that a Secular Bear market was underway.
The annotated price chart covering 2018 to 2020 for the S&P 500, shown below, are yet more examples. The S&P 500 recovered within 147 days to new highs after the 2 double-digit corrections occurred in 2018. The recovery from the 34% March 2020 correction took 127 days.
The patterns of repetition in the above charts made it very clear that the buying of dips was a learned behavior. That each of the subsequent Perilous Peaks were preceded by an additional greed accelerator as depicted in the table below provided additional support for my learned behavior theory. Population growth and easier access to market news by the public has steadily increased the number of Greed Accelerators preceding each Perilous Peak.
To prove the learned behavior theory, research was conducted on additional empirical data covering the S&P 500 from its 1871 inception through 1929. The research resulted in the discovery of the 1881 Perilous Peak, the fourth since the S&P 500’s conception.
As depicted in the S&P 500’s 1876-1900 monthly price chart below, the very first 10% correction from a record high, which resulted in the learning of the “Greed Accelerator” behavior, occurred in 1880. After the S&P 500 had reached it March 1880 record high the index corrected by 10.2% in May of 1980. Within 131 days the S&P 500 climbed to a new record high in October of 1880. The index then recorded its first ever Perilous Peak and Secular Bull market high in 1881. After correcting by 12.6% the S&P 500 was unable to climb back within the preestablished 131 days. The index instead began a steady 15-year decline to its October 1896 low.
The chart below and my additional research findings reveal that the beginning (the birth date) of a Secular Bear also coincides with the high of a Secular Bull/Perilous Peak, thus making the start of a Secular Bear market quite predictable. The birth and death dates for all Secular Bear and Secular Bull markets throughout history have coincided at the high of a Secular Bull. When the life of a Secular Bull ends at its high, the life of a Secular Bear begins. Conversely, a Secular Bull’s life begins at the bottom of a Secular Bear.
The chart below depicts the birth dates and lifespans for all of the S&P 500’s Secular Bear and Secular Bear markets from 1929 to 2021. The chart also depicts the Perilous Peaks which coincided with the 1929, 2000 and 2021 Secular Bear birth dates.
The table below contains the key statistics for the 4 Secular Bears in the above chart. The recoveries back to the prior Secular Bull’s high were much longer for those Secular Bears with birth dates coinciding with a Perilous Peak.
The extended downturns for the S&P 500 after a Secular Bull high fully supports the following thesis:
- every Secular Bull high requires the emergence of a new generation of speculators
- every Secular Bull high is followed by a minimum initial decline of 32%
- every Secular Bull high is followed by a minimum extended decline of 37%
- the period for the S&P 500 to recover to its prior Secular Bull high ranges from 8 to 25 years
Note. My discovery of a GREED Accelerator has empowered my conducting the research to discover the DNA and/or learned behavior indicator which precedes the low of a Secular Bear Market.
Since the January 2021 high for the S&P 500 is a Perilous Peak as well as a Secular Bull market high, there are only 2 questions for which investors need answers:
- When should an investor cash out?
- What should an investor invest in for the next 8 to 25 years?
The algorithms in the table below, which were developed throughout my career, provide the answers to both of the above questions. My first 4 were developed during secular bear markets.
Question 1: When should an investor cash out?
The utilization of the combination of my 3 most recently developed algorithms, in the above table, is the guide as to when to get out. The Bullish Sentiment (BSA), Bull Vix (BVX) and Extreme Analytics (EA) algorithms are operational only when the S&P 500 is at a record high.
- For a record high to be designated a “Perilous Peak” by the Extreme Analytics (EA) algorithm, a bullish sentiment anomaly (BSA) must occur.
- For the Bull Vix algorithm (BVX) to effectuate its disciplined strategy to exclusively trade VIX call options, futures and VIX ETFs a BSA must also have occurred.
The chart below depicts the 11 BSA occurrences from 1999 to 2020. The BSAs which occurred at the 2000, 2008, 2018 and 2020 highs were followed by extended corrections for the S&P 500. A Perilous Peak and Secular Bull high coincided with the 2000 BSA.
This chart depicts the Bull Vix’s 10 gains and one loss from trading the VIX during its defined post BSA occurrence trading periods. The Bull Vix was able to produce gains during all but one of the periods in which the S&P 500 remained in an uptrend.
The Bull Vix’s current forecast is for a significant correction for the S&P 500 to be underway on or before February 12, 2021. Since the date could potentially be extended based on the Bull Vix’s weekly sentiment readings, a subscription to the Bull Vix’s alerts is recommended for those who want to wait until the last minute to cash out.
Note. Only those companies which are not members of the S&P 500 and Russell 2000, will be spared the wrath of a Secular Bear market. The shares of all large and mid-cap companies will be subject to mutual fund redemptions. Thus, a buy and hold strategy with the exception being micro-caps and penny stocks will not be possible until 2024 at the earliest. Microsoft and Cisco Systems as depicted in the charts below, who were the darlings in 2000, are examples of what could happen.
Question 2: What is the investment strategy for the next 8 to 25 years? The answer to the question is in 2 parts:
Use BBT algorithm to produce short term gains. A majority of the proceeds through 2024, at a minimum, should be utilized to produce short term capital gains from the BBT Algorithm’s signals to trade long and short or index ETFs. The BBT powers the following:
- Short Bear, available by subscription to trade short or inverse index ETFs, exclusively.
- Bear Trader is available by subscription to trade a portion of the BBT’s alerts to trade long and short index ETFs.
- Bull & Bear Tracker is available exclusively through a registered investment advisor. To be referred to a registered investment advisor go to alphatack.com. The chart below depicts the performance of the BBT algorithm and the Bull & Bear Tracker for the year ended December 31, 2020. For the 3 years ended 2020, the BBT generated a gain of 204.0% vs. the S&P 500’s gain of 36.5%.
Answer 2B: Use the Growth Stock Study (GSS) algorithm to generate long term capital gains. The GSS, my first algorithm, identifies the following types of investments which have the potential to increase by 1,000% or more during a secular bear market.
- Private startups
- Micro-cap stocks
- Penny stocks
The 1 1/2-minute interview below speaks about the utilization the GSS to find and underwrite the IPO for a venture stage startup. The shares and the revenue of the company had increased by 37 and 185 times, respectively, when it was acquired.
The recent favorable changes to Securities Regulations due to the JOBS Act have resulted in the establishment of a secondary market for the shares of private startups. This new market will provide substantial capital gains opportunities, notably with much less risk for investors than the venture stage IPO market which has been defunct since 2000.
AlphaTack.com was founded to enable professional and self-directed investors to leverage my 44 years of experience and all of my algorithms to grow assets during secular bear markets and economic contractions. The site is loaded with educational information pertaining to secular and cyclical markets. Bloomberg’s 1/22/21 interview of legendary market bubble expert Jeremy Grantham is available and is highly recommended.
Finally, the current focus of my research is to determine the path the Secular Bear will take to the more-than-30% decline by 2024. Will it be a crash or will it be a steady and insidious decline? Stay tuned.