With the recent volatility in the markets and (very) extreme price action, investor confidence has been shattered. This is evident in the charts of stocks across industries, in the indices for numerous timeframes, and in sentiment. During the six year bull market, dips were buying opportunities, but not this time around. The days of deferring to the longer term charts to justify staying long are gone. There is a new trend forming, and this trend brings with it a growling bear.
Stocks have been on a rollercoaster ride with lower highs and lower lows – these are bearish patterns. If stocks can only rally up to resistance and then fail, there is just too much overhead supply. While the Earth seems to shake at the start of a bear market (probably the sound of investors rushing for the exits at the same time!), it’s quite clear that gravity takes hold of price when the crowd gets into a risk off mode.
But it’s only a 10% correction, you say? That’s true, even though the textbook rules say 20% is a bear market. Today, markets move at laser-fast speed, and when emotional outbursts happen, support levels are useless.
Let’s talk about what a bear market truly is. It is 100% psychological. It is trepidation at the thought of investing capital when there is great risk of losing it. Institutional sponsorship is gone. Companies are buying back less stock and putting up a tent for the coming storm.
I like to define a bull market as one that is going up, while a bear market is one that is not going up. Notice, I didn’t say a bear market is one that goes down – see the difference? Hence, a bear market could be one that just goes sideways. How frustrating is that to an investor? Taking two steps forward and then two steps back – it’s wasted energy. Capital is flopping around. There are no clear trends, no patterns, and opportunity cost is high.
We had a market like that back in the late 1960’s/early 1970’s. My dad was a stockbroker, and he’ll tell you that it was extremely hard to make a buck. Clients were nervous, brokers were frustrated and the prolonged bear market seemed to drag on so long that it seemed it would never end! But the great thing about a bear market is that if you keep your senses and wits in check, you’ll be around for that fresh new bull market cycle.
For now, the bull is old, tired and ready to rest. Louise Yamada, a trusted chartist, recently talked about statistics and chart facts that lay claim to this bull run being over. Louise mentioned targets that could be nearly 25% down, which, contrary to what you might think, is not a tragedy. Heck, the market is still up 200% since we hit bottom in March 2009. But if you’re not willing to accept that yes, we are in a bull market, you will find yourself on the side rails just watching the action.
