Stock markets: Extended trading range?

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I have argued for a while that stock markets will probably be fluctuating in broad trading ranges for a while. This is a viewpoint also shared by Marc Faber and backed up by my study of expected returns.

More evidence comes from Chart of the Day, with a chart illustrating rallies that followed massive bear markets. A “massive” bear market is defined as a decline of greater than 50%. Since the Dow’s inception in 1896, there have been only three bear markets whereby the Dow declined more than 50% (early 1930s, late 1930s until early 1940s, and during the very recent financial crisis). The chart also includes the rally that followed the dot-com bust during which the Nasdaq declined 78%.

“The current Dow rally has followed a path that is fairly similar to that of post-massive bear market rallies. The initial surge of the current rally lasted nearly 300 trading days and has been trading flat/choppy ever since. If the current rally were to continue to follow the post-massive bear market rally pattern, the current choppy phase would continue for another 200+ trading days,” said Chart of the Day.

The study’s conclusion more or less ties in with how I see the lie of the land.

Source: Chart of the Day, September 17, 2010.

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