Monday, December 14, 2009

The study of post crisis bull markets

Many people has been issuing warning that correction is coming. Is that a real concern? I picked two bull market periods(post Asian Financial crisis and post tech bubble) just to let us have a better feel. The first period is right after the market bottomed out sometime in Aug 1998, the first phase of bounce was fierce, 95% over a period of 5 months but subsequently followed by a correction - 15%, then followed by sharp upturn and then followed by another 16% correction before it finally peaked out, gave way to tech bubble bear market.

When the market emerged out from the tech bubble bear market in May 2001, it went through a period of ups and downs with a cycle of 4-6 months ups(no rocket up though) and followed by 1-7 months downs. However, after the market got out from the second bear market decisively, instead of very sharp upturn, it went into stewing mode(sideways) - lasted 16 months with 43% gains before registered a brief correction of 12%. The bull market continued to charge multi years gains without corrections over 10%.

Deciphering the market can be tricky because we can't just look the duration and percentage of market ups and downs and follow by a market call. There must be reasons of why the numbers behaving the way it did.

Post 1997-1998 Asian crisis, we reformed and market liked that and were confident of a V-shape recovery. The market was right then.

Tech bubble was not really our problem but the rally was influenced by the external markets. The single biggest factor in my mind was the Fed kept the real interest rate in negative territory for too long. This has fueled all kind of asset inflation and bubbles around the world, we benefited from that too.

This bull run is approaching 9 months old of which is also one of the longest without any significant pull back. Are we repeating cycles of 2002-2008. It does look very familiar -- the Fed wants to continue to keep the real interest in negative territory for an extended time.

My many years of watching the markets suggest corrections normally come unexpectedly. My sense is we need to see 1300 before a correction kicks in.

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