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100 years of Market Cycles

The 1966 Bear Market

In this series 100 years of Market Cycles, we will show investors over the coming issues all of the Bull Market and Bear Market cycles that occurred over the last hundred years.

In this article we look at the 1966 bear market which followed the 1958-1965 bull market. The 1967-1968 bull market followed the 1966 bear market.

By studying these market cycles investors gain an appreciation of how the stock market moves forward over time. These market cycles lead to good times that are followed by bad times and in turn these bad times are followed by good times. This cyclical nature is the driving force behind the stock market.

The S&P 500

The S&P 500 index was introduced to the stock market in 1957 as an index that was more representative of the U.S. economy than the popular Dow Industrial index. The S&P 500 index provided back tested data to 1925 based on the historical prices of the stocks that made up the index. This allowed investors to see how the new S&P 500 index compared to the Dow Industrial index. The back tested data prior to 1957 is still used nowadays for historical market cycle analysis.

The stock market is best viewed with a long-term perspective as this puts the stock markets current performance into the right context.

The following chart shows the 1966 bear market on a 90-year chart of the S&P 500 (actual index performance since 1957 and back tested performance prior to 1957).

Chart 1. History of the S&P 500

90yr Chart

The long-term quarterly bar chart shown above for the S&P 500 visually displays the stock markets behavior over the last 90 years. The 1966 bear market is highlighted in red and the chart shows how this bear market cycle slots into the long-term picture.

The upward trending nature of the stock market can be readily observed with the S&P 500 broadly traveling upwards in a zig-zag like manner with frequent market corrections, numerous minor bear markets and the occasional severe bear market. These market corrections can last for many months and the bear markets can last for a year or two and sometimes three.

Bull markets and bear markets along with the less severe market corrections are a normal function of the stock market. To reassure investors, the long-term direction of the stock market is upwards inline with the general expansion of the economy over the long-term.

The 1966 Bear Market in Detail

The 1966 bear market can be viewed in more detail with a 20-year monthly bar chart as shown below.

Chart 2. S&P 500 Monthly Chart

20yr Chart

The above chart shows that the 1966 bear market only temporally interrupts the markets multi-decade advance.

The 1966 bear market is shown again with a 4-year weekly bar chart which provides more detail on how the stock market moved through its bear market cycle.

Chart 3. S&P 500 Weekly Chart

Weekly Chart

The above weekly chart shows that the stock market does not go down in a straight smooth line but that the downward journey through a bear market is actually quite a bumpy ride. This is normal bear market behavior with declines and several short-term rallies lasting a month or two.

The 1966 bear market started in February 1966 and lasted for only eight months. The S&P 500 index dropped 24% before bottoming out. The 24% decline in a little over halve a year makes this a fairly minor bear market.

The weekly chart is shown again as a line chart together with a 12-week moving average.

Chart 4. S&P 500 Highs and Lows

50MA Chart

Previous bull markets can end suddenly and the next bear market begins. To help identify when a new bear market has begun, investors can use the principle of Relative Highs and Lows. The 12-week moving average aids in highlighting these Relative Highs and Lows.

From the above line-chart, the February 1966 RH (Relative High) marks the start of the bear market. Normally bear markets show at least one lower RH and one lower RL (Relative Low) before they bottom but this bear market showed none. The first RL occurred at the end of the bear market and this trading action is more typically found with minor bear markets such as market corrections.

The 1967-1968 bull market followed the 1966 bear market.

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