IBD Chairman William O'Neil: Supercycle Bull May Arrive

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The founder and chairman of Investor's Business Daily is usually reluctant to predict what the market is going to do.

But days away from the Nov. 6 presidential election, William O'Neil wants investors to prepare for something that could take place within the next one to three years and be even more influential -- the dawn of a bull market that may grow to supercycle status.

A supercycle, according to O'Neil, lasts 12 to 15 years and includes three normal bull markets that last 3-3/4 years each.

Each bull run is followed by a typical bear market that lasts eight to nine months.

It's usually darkest before dawn, as that old saw goes. The first decade of the current millennium has certainly had its dark spots.

The popping of the dot-com bubble led to a 78% bloodletting of the Nasdaq composite, from its March 2000 peak of 5132 to its October 2002 low of 1108.

After an extended cyclical rally in which tech, commodity, retail and medical stocks flourished, the market plunged again. As two banking giants, Bear Stearns and Lehman Bros., imploded, the Nasdaq suffered a 56% dive from the end of 2007 to its 2009 bottom at 1265.

During the Great Recession, the economy fell into a deep freeze, joblessness surged and much of the banking sector went on Federal Reserve-led life support. But in the eyes of O'Neil, who began trading stocks in the 1950s and has studied 27 market cycles going back to the 1880s, the 2000s also reflected the market's tendency to digest the gains from a prior superbull.

Indeed, that bull market, spurred by President Reagan's tax cuts and Federal Reserve chief Paul Volcker's success in killing inflation, produced huge gains. The S&P 500, upon staging a key follow-through day on Aug. 17, 1982, rose 1,430% from its low that month of 101.44 to its March 2000 peak of 1553.10.

"It's really a generational thing that seems to last 18 to 20 years on the upside," O'Neil told a crowd in Cincinnati last week.

"In the 1900s, it took a lot longer for things to happen. But after we won World War II, the country has been an outstanding leader in the whole world, and these are the cycles that you tend to run into."

Readers who have attended an O'Neil workshop know that the 79-year-old serial entrepreneur enjoys speaking about politics. But in Cincinnati he focused on the key ingredient that goes into every major bull cycle. What is it?

"The one fascinating thing about the 27 cycles is that not just three out of four, but every single cycle was led by either new inventions or innovative entrepreneurial companies that had something brand new and different than everybody else in their industry," he said.

O'Neil discussed the action and traits of big winners in the 2009-11 bull market, includingAlexion Pharmaceuticals ( ALXN ),Baidu ( BIDU ), Chipotle Mexican Grill ( CMG ),Lululemon ( LULU ) andUlta Beauty ( ULTA ) .

The purpose? To show how new bull markets feature new outstanding companies and terrific stock runs. But an investor can't simply hop into one of these proven winners after they've proved their mettle and simply relax.

"This country evolves and changes, cycle after cycle after cycle. If you're a phenomenal company, maybe you get away with two cycles, but it's not much after that," O'Neil said. "The irony is that when the one stock tops and it's replaced with something new, it's something that you've never heard of. This is where this cycle is going."

Today the plunge in natural gas prices spurred by hydraulic fracturing could be a potential catalyst for new big stock winners -- and the overall economy, which continues to struggle three years into a recovery. (See story on Page A6.)

Three-dimensional prototype-modeling technology is transforming American industry. Wednesday's IBD 50 is topped by3D Systems (DDD). RivalStratasys (SSYS) has a 99 Composite Rating. It's increased earnings per share an average 57% the past four quarters.

The IBD 50 also showcases fast-growing companies that are innovating health care, fashion, food retailing and e-commerce.

The stock market rallied significantly since the March 2009 bottom. Recent choppy action in both 2011 and this year remind O'Neil of the market from 1958 to 1962.

Back then, the economy was recovering well. But in 1962, the government planned to investigate the mutual fund industry for the first time since the 1930s. President Kennedy led the crusade against U.S. Steel's decision to raise prices. The Cuban missile crisis also led to a correction that year, with the S&P 500 dropping nearly 30%.

2009-10 had a similar upward trajectory to 1958-59. But in the spring of 2011, the major indexes stalled, and the NYSE composite fell more than 20%.

"Like the 1958 to 1962 period, where you had a couple (of good) years, then you started having trouble. That's because you have something not working right, usually in the government sector," he said, adding the market might not necessarily mimic the drop in 1962.

Understanding where we might be in the stock market's long-term cycle is instructive. But it doesn't take precedence over the day-to-day analysis of the market's price and volume changes. You need to know what the market has been doing and its current trend.

"Personal opinions are worth nothing," O'Neil said. "You've got to have buy rules. You've got to have sell rules. You've got to have market rules."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Personal Finance , Investing Ideas
Referenced Symbols: ALXN , BIDU , CMG , LULU , ULTA

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