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In this week's Barron's, Mike Santoli looks at the long-term cycles of the Dow. The really long-term. Here's the chart from Rydex:

You can see that there are several long cycles to the Dow (flat, up, flat, up, flat, up). This chart is a favorite of Barry Ritholtz's, and he even has his own, and I think, better version.

There's an important lesson here: Investors need to have long time horizons. There have been long periods where the markets have been flat. I'm glad I wasn't a professional investor in the 1930s or 1970s.

However, I don't think all hope is lost. Here's a chart of the total return of the market since 1925 (data is from Ibbotson). The blue line is the market. The two black lines are upper and lower trend lines, and the red line is a "best fits" trend line.

Unlike the Rydex chart, this includes dividends. That makes a big difference. It's also much broader than the Dow 30. Keep in mind that if the editors at Dow Jones hadn't have taken IBM out the index in 1939, the Dow would have broken 1,000 in 1961 instead of 1972. The Dow underperformed the rest of the market for decades.

Even after all the pain of the last six years, the Wilshire 5000 Total Return Index (^DWCT) came within inches of a new all-time high just a few weeks ago. Bottom line: I think we're sitting in the dead center of the long-term trend.

Update: Sam Stovall at S&P lists what he calls "bull market corrections" since 1970.

Posted by edelfenbein at June 10, 2006 6:21 PM