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With the S&P 500 trading as high as 1,709 this year, many investors are optimistic that a new bull market is under way. This is the third time since 2000 that the S&P 500 has stalled near 1,575. In 2000, the index topped at 1,552. That level was topped briefly in 2007, when the S&P 500 reached 1,576. Bear markets and losses of more than 50% followed each of those tops.
The two previous declines were cyclical bear markets within a longer, secular downtrend. Secular trends in the stock market can last for many years. We enjoyed a secular bull market from 1982 to 2000, an 18-year period with an average annual gain of 19.3% with full dividend reinvestment.
As you can see, there are a series of cyclical trends within a secular trend. Prices did not move straight up from 1982, but were interrupted by bear market declines of 20% or more in 1987, 1990 and 1998.
The secular bull market gave way to a secular bear market in 2000, and we have had two cyclical bear markets since then. Many investors remember the pain of those bear markets well. We have also seen cyclical bull markets that delivered gains of more than 100% in the S&P 500 from its 2002 lows to its 2007 highs, and more than 150% from its 2009 lows.
Now, we have to ask what comes next. For help answering that question, we can look to history to see how previous secular bear markets unfolded.
Between 1968 and 1980, the S&P 500 repeatedly faced resistance near the 100 level. The monthly chart below shows that steep market declines followed tops near that level.
The S&P 500 fell more than 35% after the top in 1968, and almost 50% in the bear market that began in 1973. A narrow trading range developed when the S&P 500 reached 100 for the third time in 1976.
But this time around, the market hasn't built a base like we saw in the late 1970s. There is no requirement that prices need to build a base, but we also saw a base after the bear market that began in 1929.
In addition to the lack of a base, fundamentals argue against the beginning of a new bull market. When the bull market began in 1950, the price-to-earnings (P/E) ratio was under 10. The P/E ratio was also in the single digits in 1980 when that bull market began. Now, the P/E ratio on the S&P 500 is at 15.3, well above the oversold extremes seen at the end of previous bear markets.
We will have another secular bull market, but the chart and fundamentals do not point to it starting right now.
If history repeats, we could be in for a few more years of a bear market or at least a basing pattern, where only small gains are made. Investors should consider using defensive investment strategies until the stock market presents a clear bargain.
Options selling is a defensive strategy that also allows investors to participate in the upside if the market continues rising. By selling put options on high-quality stocks, we earn Instant Income and have the chance to buy when prices decline. Selling covered calls on stocks that you own can also provide immediate income and decreases losses if prices decline.
In fact, my readers have used these strategies to earn anywhere from $1,873 to $150,000 in Instant Income this year alone. Find out how you, too, could make $1,000 a week or more regardless of where the overall market is headed, by clicking here.
No one knows for sure what the future holds. But selling options can help protect you from losses in a bear market while allowing you to participate in the gains of a bull market.
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