The bear market in US equities may have ended at its mid-June low. Or maybe it’s only half done. And, while the second half of the bear market is still ahead of us, the biggest losses may or may not be yet to come. You can take my word for it.
The reason for pointing out these otherwise insignificant truths is to counter Wall Street’s endless attempts to slice and dice market data. Most of these attempts are little more than statistically suspicious data mining, revealing more about the analyst performing the mining than the market itself.
A number of recent social media posts have argued that the worst of the bear market is yet to come. The implication is that bear market losses tend to be “back-loaded,” with bear markets ending in a crescendo rather than a groan.
There are two flaws with this line of thinking. First, the average on which it is based is calculated from a small sample because (fortunately) there have not been many bear markets in US history. Thus, any conclusion should remain tentative at best.
Consider the 11 bear markets since 1980 in the bear market calendar maintained by Ned Davis Research. In four of them, the Dow Jones Industrial Average DJIA,
lost more in the first half than in the second. So, even if it is true that the average bear market has its losses “loaded upside”, it’s a safe bet that this will continue to be true in the future.
The second, more fundamental flaw of this line of thinking is that it is based on a tacit but nonetheless crucial premise – that the current bear market is still in its infancy. But this premise is precisely what we do not know.
It’s true that during the nearly six-month decline from January’s market high to its mid-June low, the Dow lost more in the second half than in the first. Still, that tells us nothing about whether the bear market is over or still has a long way to go.
closer to the end
There is one aspect of this line of thinking that I consider more significant: it is indicative of a significant shift in tone among analysts. Contrary to previous analyzes which essentially tried to put an optimistic spin on the market’s losses, the tone that emerges is more pessimistic. Rather than concluding that the worst is behind us, we are now being told that the worst is ahead of us.
This changing mood suggests that we are more advanced on the five stages of bear market grief that I have discussed in recent columns. As late as late July, I judged the mood on Wall Street to be in the third of these five stages – negotiation – with depression (stage 4) and acceptance (stage 5) still to come. The pessimistic mood that is beginning to dominate social media is typical of Stage 4 grief – which, on the contrary, means we are closer to the bear market’s last gasp.
We are not there yet, so it would be premature to celebrate this last pessimistic turn. The market still has to deal with this incipient depression and then go through the acceptance phase. For these and other reasons, I feel like we are in a bear market and the June lows will be broken.
Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be reached at firstname.lastname@example.org
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