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The Most Important Chart in the World Right Now for Stock Investors

February 25, 2013 | About:

Most people won't ever have seen a chart like the one I am about to show you.

It's not because they wouldn't find it useful. It's because most mainstream financial advisers have little interest in the really big picture.

Greed is a powerful force in the markets. So is fear. But common sense, memory of past lessons and big-picture thinking don't feature much. As John Kenneth Galbraith said, "There can be few fields of human endeavor in which history counts for so little as in the world of finance."

Which is why we have things called "financial bubbles." Greed, combined with a lack of understanding of the past, entices investors to invest alongside the crowd in pursuit of profit... even if they can't explain why they think the price investments will continue to rise.

That is why today's chart, below (courtesy of the folks at Bespoke Investment Group), is so important. Because it allows you to see present circumstances in the light of past events. And it gives us some important clues as to where stocks might go next.


The three shaded areas highlight three secular bear markets that the S&P 500 went through over the period — the first during the Great Depression, the second between 1966 and 1982 and the third starting in the late 1990s and lasting through to today.

A secular market is one that's driven by long-term forces — such as economic expansions, breakthroughs in technology, political change and big demographic shifts. In a secular bull market, a rising tide of optimism lifts all boats. In a secular bear market, that tide of optimism falls again, taking asset prices with it.

What most people don't understand about secular markets is that within them you get strong countertrend movements. A secular bull market — like the one that ran from 1982 to 2000 — will have bear moves within it — the 1987 crash being a good example. And secular bear markets will have strong bull moves within it — such as the recent 125% or more of the S&P 500.

But despite these counter-trend moves, secular bear markets keep stocks locked within a trading range (the shaded areas on the chart above). In other words, markets are often flat after a secular bear market begins.

The big question is whether stocks are right now mounting the mother of all counter-trend rallies, or whether they are on the point of breaking out of a secular bear market and entering a secular bull market.

We don't know the answer. But we do know that the average secular bear market lasted 14.5 years. And that P/Es compressed by an average of 9 points — from 20.5 at the start to 11.3 at the end. And we know that we've been in the current secular bear phase for 12 years and have seen P/Es come down from a peak of about 40 to about 17.

A lot will hinge on whether the S&P 500 can break out to the upside from its current 13-year range. If so, it will likely be taken as extremely bullish. But the experience of the Great Depression was that there can be plenty of head fakes and false starts along the way.

Rating: 3.1/5 (7 votes)


Crafool premium member - 4 years ago
Just curious. Can anyone list the Gurus that are chart followers? Can they compare their investment records to the Guru's that follow the "value investing" style?

I still have a hard time understanding how looking really hard at lines gives me an advantage over someone doing good old fashioned value investing based on thoughtful fundamental analysis. I mean I understand trying to buy 50 cent dollars but trying to determine if the next move in that chart line is up or down seems a little like gambling to me for it seems more like the successful outcome comes more from luck!

Happy Investing to all!

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