Interesting reading from the TC2000 on bear markets
The Worden Report (Friday, May 12, 2000)
Bear Markets
There are grand bull/bear markets, cyclical bull/bear markets, intermediate-term upmoves/corrections
and minor up and downswings. Minor trends last a few days or weeks and have no sub-cycles within
them. Intermediate trends usually involve a few short months and embody two or more minor
trends. Grand bull/bear markets last for decades and embody multiple cyclical bear markets. What I
am focusing on here are cyclical bear markets ? what we usually just call bear markets.
Cyclical bull/bear cycles have historically usually lasted about four years, three years or more of the
four being bull market years. However, the markets have been so strong in the 90s, we almost
skipped one cyclical bear. After the bear market of 1990, another was due in 1994 or thereabouts.
Instead, in both the Dow and the Nasdaq, we had 12 months of lateral consolidation in 1994. Four
years after that, in 1998, we had a bear market in both the Dow and the Nasdaq.
A bear market shakes the understructure and the psychology of the market very badly. After it
finishes its downside trauma, it needs time to shake out the cobwebs. Unlike intermediate-term
setbacks, which often make simple V bottoms and end on so-called ?selling climaxes,? in bear
markets your biggest volume climaxes usually occur on the way down ? not on the final bottom, or
at least not on the final ?test? of the bottom. These so-called ?selling climaxes? are dependent as
much on buyers as on sellers. They can only happen when buyers waiting in the wings think the
selling is being overdone, and so they come in with heavy money, snapping up what they believe to
be bargains. The market snaps upward. The volume is especially heavy on that day of capitulation.
However, in a bear market, after a climax and a rally, the market may roll over and start down again,
the volume and pace accelerating as it plunges through the previous low. This leads to another
?selling climax? at a still lower low.
So what happens? Eventually, the buyers lose their confidence. They don't rush in for those
bargains, because they're scared. That is why I say bear markets often end in a whimper. This
phenomena is observable in some individual stocks even more clearly than in the market.
What exactly is a bear market? Over the years, experienced investors noticed that when the market
went down about 20 percent, they felt as if they had been in a bear market. It takes that at least to
change the psychology of investors (something that doesn't have to take place in an intermediate
correction). Recently, CNBC picked this up and decided that 20 percent is the ?official?
determination of a bear market. Well, this kind of banter is pretty harmless. What really makes a
bear market is the amount of technical and psychological damage done to the market, but that isn't
measurable.
However, consider what a bear market does. It ?corrects? the excesses of a specific market advance.
It does this by retracing a portion of the advance. If that advance was relatively restrained, it doesn't
take much to correct it ? maybe less than 20 percent of the overall price of an average. If that
advance was huge, it may take a lot more than 20 percent to correct it.
This is probably a bear market we're in. So what exactly is being corrected? Let's look at both the
Dow Industrials (DJ-30) and the Nasdaq Composite (COMPQX).
I have already said that both averages consolidated for 12 months in 1994, a year in which a bear
market was due. The next was due in 1998. It would be the job of that market to correct the move
from the beginning of 1995 until the top in 1998. Here's what happened to the Dow. (Please accept
the fact that all numbers used are being eyeballed from charts, which is good enough for the purpose,
so please don't write me letters about minor inaccuracies. And I don't have room to be constantly
using the word approximately.) The Dow advanced from 3700 at the beginning of 1995 to a high of
9300 in 1998, an advance of 5600 points. In a bear market move, the Dow then declined 1900
points to 7400, a 20 percent decline. However, it retraced 34 percent of the move from 1995, a
marginal but adequate correction. (Most technicians regard 33-66 percent as a normal retracement.)
From 1995 to 1998, the Nasdaq advanced from 710 to 2028. It then fell to 1400, a decline of 628
points or 31 percent. However, it was not marginal in any way. It retraced 47 percent of the
spectacular advance from 1995 (which had been almost a tripling in four years).
Since both the Dow and the Nasdaq have corrected themselves up to late 1998, we can assume that
the only period to correct is from the October bottom in 1998 until this year's high in January at
11,750. In the case of the Dow, this is a 4350-point move. A one-third retracement would bring it
down to 10,300 (where it's already been to) and a 50 percent retracement would bring it down to
9575. We think the 1998 tops provide pretty good support at 9200, which would be a very full
retracement of 59 percent.
Starting at the October 1998 bottom, the Nasdaq advanced 3600 points to 5000. A one-third
retracement would bring it down to 3800 and a 50 percent retracement to 3200. We've been
projecting a worst case of about 2900, which would represent a very full proportion of ? well,
whaddaya know, same as the Dow ? 58 percent. (Yes, to me 58 and 59 percent are the same thing.
Hold your pen, knave. If I received a letter like this in my email, I would knight the guy and dub him
Sir Bear Market.)
One last question to address. Why has this bear market arrived two years too early? It doesn't even
jive with the presidential cycle, in which election years are assumed to be bullish because of the
lavish promises? Search me. Ask Alan. -DW
Teddy Is Still Growling
The market is not acting well. If there is any point in its favor, it is that it is so obvious everybody is
noticing it. The Nasdaq Composite closed on its low. Stocks like IBM, INTC and AMAT look like
shorts. Great companies with great products.
Anyway, as we hope you will discern from the remarks above, we are not prognosticating a
doomsday scenario.
GT@copy&paste.com |
