So we've had a couple of down days in the market. How will we know if, after almost 11 years of a Bull Market, we've now changed direction and are beginning a Bear Market?
Its the question that's on everyone's mind. And the unfortunate fact is that we can't. Not currently. It's way too early in this process, to definitively state that the market direction has changed.
For those who follow the various technical sites, you've no doubt seen that they are indicating that they will need a few more days or weeks to really determine whether the market trend has changed.
But a question that we can ask now, is how does a bear market behave in the early days of a trend change. In other words what should we be looking for, if indeed we moved into a bear market?
So let's use history to see how most Bear Markets look. By the way, there are always exceptions to this general explanation. For instance what I'm about to describe does not fit the 1974 Bear Market Decline, which was an agonizingly slow, methodical a fair. And what I'm about to describe does not describe the 1987 Bear Market, which went down and back in the blink of an eye.
No, what we're about to look at is historically how most Bear Markets behave in the early days of their decline. This time may or may not be the same.
Now, if you have a chart of the major market indexes or averages: say the Dow or S&P 500, draw a vertical line through the recent peak of the market. On the left will be the bull market we've just experienced. While on the right is the future market, perhaps the bear market.
Notice how the market we've just been through, was rising almost vertically. That's important. Because the bear market, if there is one, will, if it follows history, be a mirror image of that bull phase.
And in fact, because Bear Markets only last about 1/3rd as long as Bull Markets, the first move in a bear market will be more violent and shorter.
So draw a dotted line down from the market's peak declining around 10%. IF, and note I said IF, we've begun a Bear Market, And IF it follows historic patterns, this is what I would expect to see in the markets first move. A 10% plus decline.
Then draw another line up not quite as far. This is the major rally which usually follows that initial dramatic decline. It is classically called the Bear Trap. Because it entices many to re-enter the market. And it usually retraces ½ to ¾ of that initial move.
Now in 1987, this was it. The end of the Bear Market. The market recovered on this leg of the Bear and went on to become one of the most historic Bull Markets of all time.
But generally, if we've truly begun a Bear Market, prices will again turn down after that Secondary Rally higher, on to decline in a stair-step manner, over and over again.
So what do I think? Well, I wasn't looking for a Bear Market to emerge right now. The economy has been reasonably strong, with no real signs of a recession right now. And all of the powers that be: The Federal Reserve and the US Treasury are solidly on the side of accommodation. Easy credit, low-interest rates, support of the short term lending facility in the Repurchase Markets.All signs that the political side of this equation is pushing things higher.
But there is one over-arching issue. A concern that seems to loom larger every day. And that is the Covid-19, novel Coronavirus. This is a complete wild card.
And after spending the past month ignoring this problem, the Covid-19 now has Wall Street's complete attention. And this reaction has been dramatic.So watch our model. See if the market follows your dotted line.
Or if with the coming of Spring, the Virus fades into history, and the market continues its historic Bull Run.