Indicator of the Week: Does this Bull Market Have Legs?

It was March of 2009 when the Dow Jones Industrial Average (DJI) bottomed during the financial crash. It's six years later, and the index has gained an inspiring 18% per year on an annualized basis. About a year ago, I wrote on the five-year anniversary and found similar times in history. I'll revisit those times comparing where we have headed since to see if we're getting any sort of picture about where we might be heading from here.

Past Similar Rallies: A year ago when I wrote on this, I noted the Dow had lost value in the five years preceding the rally (specifically, losing 7.8% per year on an annualized basis), and then returned 18% per year over the next five years. There were three other times in history where the Dow had declined in a five-year period, and then increased at least 15% per year for the next five years. They were all pretty notable times, which I list below.

• December 1925: Right in the middle of the Roaring '20s, with four years of huge gains following.
• December 1936: This was a rally in the midst of the Great Depression, in which the Dow more than quadrupled from 1932 to 1937. It didn't last long, though, as the index would lose half its value from March 1937 to March 1938.
• August 1986: There were even bigger gains to follow this rally, with the Dow gaining 40% over the next year. However, just a couple months after that, Black Monday occurred. On Oct. 19, 1987, the Dow had its biggest one-day drop -- falling over 20% on a single day! The market rallied after that day, but surely plenty of fortunes had already been lost.

Here is a table I had in the piece last year. Since it's a year later, I'm able to fill in parts that were previously unknown (the six-month and one-year returns). Recall, the dates I show in this table are marking the end of five-year rallies off of five-year declines. Below this table, I chart the path of the Dow after each one of these dates to see how the current path is shaping up against these prior times.

Looking at the chart below, the good news is that the current path of the Dow is closest to the path from December 1925. As I mentioned, huge gains followed that date over the next few years, though it ended badly in the Great Depression. The other dates in the table -- August 1986, for example -- saw a huge rally over the next year, and then a devastating single-day crash. December 1936, meanwhile, saw a huge decline over the next year, and then a struggling market going forward for the next couple of years. Hopefully, this indicates we're at a happy medium and in the midst of a healthy, sustainable rally.

10-Year Annualized Returns: Here's another interesting chart graphing the 10-year annualized return on the Dow all the way back to 1910. Eyeballing this chart shows three distinct rallies, and an average historical return of 5.3%. The prior three rallies lasted 15, 20, and 25 years, while we're only at year six of the current rally. Combine that with the fact that the current 10-year annualized return (5.5%) is just a hair above the average, and you could come to the conclusion that we have a long way to go before we're overbought and that more gains are on the way.