Secular Trends
One of the best ways to lose money in the stock market is to try to make a lot of money quickly. This is because attempts to make a lot of money quickly will lead to the taking of excessive risks. Stock market gamblers -- people who place large bets on short-term outcomes and/or high-risk situations -- might be very successful for a while depending on the market environment in which they are operating and how lucky they happen to be, but they are unlikely to keep the money they make. Like all gamblers, stock market gamblers have a subconscious desire to lose and will continue to push their luck until it runs out. It is, however, possible to make and KEEP a lot of money by a) understanding the secular trends and keeping one's investment position in synch with these trends, b) being patient (not trying to make a lot of money quickly), and c) doing the opposite of the manic-depressive crowd (increasing exposure to a long-term bull market when the crowd becomes depressed and reducing exposure when it becomes manic).
One of today's clearest and most important secular trends is the upward trend in the gold sector of the stock market relative to the overall market. By using the Dow Industrials Index to represent the overall stock market and the Barrons Gold Mining Index (BGMI) to represent the gold sector we've attempted to illustrate the situation on the following chart. Notice that a 20-year downtrend in the Dow/BGMI ratio ended in 1980 and that this secular bear market in the Dow relative to the BGMI was followed by a secular bull market in the Dow relative to the BGMI (a 20-year upward trend in the Dow/BGMI ratio). Notice, as well, that the long-term trend clearly changed again near the start of the current decade and that Dow/BGMI is now about 5 years into a secular bear market (a long-term upward trend in the gold sector relative to the broad stock market). Secular trends always last at least 10 years and if past is prologue then the current Dow/BGMI trend will last 20 years, so the gold sector will be trending higher relative to the broad market for at least another 5 years and potentially another 15 years.
Interestingly, although the secular trend change that occurred near the beginning of this decade is obvious on the below chart and is consistent with long-term trends in inflation and stock market valuations, few people are aware of it. This is not actually unusual, though, because it is typically only during the last few years of a secular trend that the public becomes a true believer in the trend. It is, in fact, the public's 'falling in love' with a trend that inevitably pushes valuations to extremes and sets the scene for the next major trend change.
Two years of consolidation or two years of topping?
The period since the beginning of 2004 has been unusually frustrating because consistent trends have been few and far between. The following weekly charts, for instance, show that both the Dow Industrials Index and the AMEX Gold BUGS Index (HUI) have moved back-and-forth within horizontal ranges during this 22-month period and that both were higher at the beginning of 2004 than they are today.
28 October 2005
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Steven Saville
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