Bull and bear at the edge of crumbling cliff (Photo credit: Getty)

Bearish warnings are numerous but suffer from two flaws. First, bears treat the last nine-year period as if it was one long bull market, now tired and aged. It is not. Second, bears offer negative reasoning, but it all starts with the view that the stock market is too high. It is not.

Disclosure: Author holds U.S. stocks and U.S. stock funds

Stock market’s nine-year rise is not one long bull market

Of the total period, only five years were bull rises. The other four years were spent in three different stalled/foundation-building states. During each stall, fundamentals shifted, investors regrouped, and the stock market created a new foundation for a further rise.

In order to see the stock market’s true behavior during those nine years, we need to adjust the typical graph accompanying the “too long” articles.

First, the common OHLC (open-high-low-close) graph, using weekly data

DJIA 9-year OHLCJohn Tobey (StockCharts.com)

The problem with this graph is that it is needlessly noisy, showing the range of trading each week.

Second, use a line graph showing only the weekly closes

DJIA 9-year lineJohn Tobey (StockCharts.com)

Better, but the line still has many wiggles associated with short-term moves, not the longer-term trend.

Third, overlay the line graph with a moving average

DJIA 9-year line and moving averageJohn Tobey (StockCharts.com)

Even better, because a moving average better shows the underlying trend and trend changes. However, the nominal price scale is misleading when there are large, percentage moves such as during this period.

Fourth, use a logarithmic scale

DJIA 9-year line and moving avg, log scaleJohn Tobey (StockCharts.com)

Best. Now we can see the trend in percentage growth terms (a straight line represents a constant, percentage growth rate). This graph gives us the stock market moves to analyze.

Now, the analysis that shows three bullish rises and three stalled, foundation-building periods

In studying this graph, it is important to remember the fundamental drivers and and bouts of optimism and pessimism that accompanied the visible market moves.

DJIA 9-year analysisJohn Tobey (StockCharts.com)

So, where are we now? Likely, coming out of the 1-year stall/foundation into a new rise. Of course, the market could fall back into the stall area or even reverse course and head down. However, the key point is that it isn’t destined to fall because it’s gone up for nine years in a row.

The bottom line

Bears have been persistent, warning that this stock market simply cannot keep going up. Now we see that, actually, it could go up more because its nine-year gains were earned in a reasonable foundation-building, rising pattern.

But what about historical comparisons?

Okay, let’s look back to 1990, at the time of the financial (S&L, bank) recession. Since then, there have been three extended, rising markets. The first two topped when bubbles produced unsupportable conditions. So, the question is, what is today’s stock market bubble? Answer: There isn’t one. (No, the bears’ contention that investors are overly optimistic cannot be used – it is a contrived rationale to support their view that the market is too high. That’s simply a case of circular reasoning.)

DJIA long-termJohn Tobey (StockCharts.com)

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