BULL OR BEAR MARKET?
A LOOK AT THE EVIDENCE
(Updated December 15,2000)
The following are remarks accumulated during the past year which help reflect on what is happening in the market now. If some appear outdated, it is only because these remarks are accumulated as the market has been trading during the past year. Looking back at these remarks as they were written help form an overall view of the stock market as events unfold.
One of the most significant changes in the stock market in the past year or so is the change in the long term technical indicators. Click on any of the following links to view any of the classic Longer Term Indicators.
An important factor is the divergences we are seeing. When the market was good, most of the stocks were also good and the averages made highs. Mixed markets were few and far between then as the averages pushed ahead, not set back often, and when they were set back, came back, often roaring ahead to new highs.
The weakness in some individual stocks as well as the recent weakness in the market has no doubt hurt many funds, possibly putting some of them in trouble.
An interesting aspect of the prices now, is the potential "head and shoulder" formation in the long Term Dow coming together with unusually high volume, very typical signs of a final blow off in a bull market. A similar formation is showing on the London FTSE chart. If the "neckline" of this formation is broken, i.e. a sustained break below 10,000 in the Dow (or below 6,000 on the FTSE), it is considered extremely bearish because these formations have preceded large declines before - they are well known by market technicians.
Another significant factor is that we have not seen losses or heavy volume which are out of proportion to what has been happening, which might give us a signal that the declines are over. Usually at the end of a period of decline we might expect to see a steep decline, usually accompanied by lots of volume, but when the market rallied in August we didn't see anything to suggest it was a major turnaround. Instead we see continuing losses with occasional rallies interspersed between declines.
If indeed this is a bear market as so many of the longer term indicators are suggesting, it is important to consider that historically the worst part of a bear market often comes in the beginning, just as prices are changing their trend and heading down. The NASDAQ lost 48% since March of this year. It is hard to ignore a loss of such proportions, call it a "correction" and expect things to go on as though nothing happened. Although the Dow and the S&P have not lost that much, we cannot help but wonder if that is soon to come. Remember that declines come when least expected and with the minor encouragement of recent rallies, this could be such a time.
Most significant are the fundamentals: The Dow Industrials are selling at over 20 times earnings, the S&P index is selling at an absurd almost 30 times earnings - and no one knows at what ridiculous heights the NASDAQ is at.
It seems obvious we are seeing the beginning of a major turnaround, the end of one of the biggest bull markets in history and the beginning of the subsequent reaction to the excesses of the past decade. It is clear the bull market is over and the bear is at the door (actually well inside).
Many people are looking forward to more money going into 401-K and other type of pension funds plans and schemes, but in reality the stock market in recent years has been a big "pyramid" scheme, ignoring fundamentals.
Many people think the next generation will do the same, ignoring the fact that other investments make much more sense than stocks do at these levels, and blindly put their money into the hands of middlemen who encourage them to think they will make it multiply in exchange for high fees, commissions, and any number of schemes to make hard working people part with their money.
Hopes are pinned on newcomers being just as stupid, ignoring earnings and dividend returns, and instead relying on the "greater fool" theory, hoping a greater fool will come along and take their already overpriced shares off their hands for even more money.
During the past decade or so, there has been a sort of mass hysteria in the financial markets, what can be called the "Rumpelstilskin Syndrome". Many naive and inexperienced people were attracted to it, thinking as Rumpelstilskin did, they could also spin straw into gold.
Likewise, many thought that shares of companies could be turned into a lot of money, whether it was logical or not, encouraged by many young and inexperienced brokers and mutual fund managers (as well as many older and experienced professionals who profited from the hysteria).
Those who got caught up in the get rich quick schemes are now seeing the chickens come home to roost, and even now, when it is obvious that things are not turning out as they expected, they still hold on to their shares, many of which are likely to turn out to be worth a lot less and some even worthless.
It is hard to forget the overall picture of declining long term indicators and poor fundamentals. Triple digit declines in the Dow Industrials and the NASDAQ have been occurring much more often lately, although half forgotten when the markets appear to rally as they have recently. However we are seeing triple digit declines as common occurrences. This is not what we usually see in a bull market; this is more like bear market activity.
If anyone is expecting to see a newspaper headline announce the bull market is over and the bear market has begun, they will be waiting a long time. The only way you will know is to look at what's happening and act accordingly.
We are beginning to see only what makes sense. If there is any truth to the idea that markets go through cycles (sometimes there are good times to invest in the stock market and other times not), then what cycle would a reasonable person guess we were in now?