The question is, is this just a nice bear market rally or the real thing?
Interesting WSJ article today about that:
April 19, 2001
Money & Investing
A Beast of a Question:
Is It a Bull or a Bear?
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
It's a bear market. No, wait -- it's a bull market! Which is it, anyhow?
With Wednesday's 8.1% surge, the battered Nasdaq Composite Index now has leapt 26.9% in just nine trading days since April 4.
The stock market is always either in a bull or a bear market. Just as the most common definition of a bear market is a 20% drop from a closing high, the most common definition of a bull market is a 20% rise from a low. But despite the Nasdaq's recent rally, the index is still down 58.8% from its closing high of March 10 last year. So, is the Nasdaq composite back in a bull market now?
"That is THE question we are asking ourselves right now," said Michael Weiner, portfolio manager at Banc One Investment Advisors, Banc One's money-management arm in Columbus, Ohio. Definition or no definition, he has serious doubts. "This seems more like a bear trap," or a frantic, temporary rebound that soon will be erased by more selling, he worried.
It is definitely a bull market, countered Jeff Rubin, research director at market research firm Birinyi Associates in Westport, Conn. "A 20% move is a 20% move, whether it happens in 10 days or 127 days," he said. "You still made 20% on your money."
Other experts, however, say that for the volatile Nasdaq, it will take a 30% gain before people start believing that the current rally is a lasting bull market -- and even then, many will fear that it could evaporate, as past rallies have.
Clearly, the terms "bull market" and "bear market" mean different things to different people. The definitions aren't as simple as they seem.
It may sound odd to a long-term investor, but for an active trader, there can be three bear markets and three bull markets in a single year. In fact, strictly speaking, that is precisely what the technology-dominated Nasdaq Stock Market has just experienced. It peaked at 5048.62 on March 10 of last year, fell 37% through May 23 -- the first bear market. Then it had a bull market, or a 35% surge, through mid-July, a bear market through early January, a three-week bull market in January, and then another bear -- which gave way to the latest rebound.
For someone playing the market daily, all those swings mattered plenty. But does that make sense for a longer-term investor? Even after Wednesday's huge 8.1% gain, after all, stocks still are selling for less than half what they sold for just more than a year ago. Few people who held tech stocks during that period feel as if their investments are experiencing anything but a deep, grinding bear market. In the midst of that, a 20% rise doesn't seem quite as big a deal.
Investors are quick to note that, for many people, whether it is a bull market or a bear market has more to do with the performance of their individual holdings than of the broad indexes. Some stocks are up over the past year, meaning that some people aren't feeling the bear at all. And the market's status can be as much a matter of psychology as of numbers. If people are scared and are tempted to sell out after any gains, that is the hallmark of a bear market, regardless of what the short-term gains are. If they are exuberant and buying stocks whenever the stocks weaken, that sounds like a bull.
Those who are skeptical of the bull case point out that big, sudden moves in the past often have been false rallies, not sustainable gains. Before this month's surge, 10 of the 11 biggest one-day moves in the Nasdaq came during the long decline from last year's record close. They weren't signs of a recovery; all were wiped out in later declines.
The broader indexes certainly aren't showing the same huge swings that are turning up in the more volatile Nasdaq. The Standard & Poor's 500-stock index, the big-stock measure most widely followed by professional money managers, still is up just 12.2% from its recent low, far from the 20% recovery that would signal an end to its bear market. The Dow Jones Industrial Average never was down 20%, meaning that by this measure it wasn't in a bear market at all, and its recent gains, compared with Nasdaq's, have been small.
Many analysts believe the 20% rule is more a rule of thumb than a dictum based on mathematical studies. Market historians say it has been adopted only in recent decades as analysts have tried to quantify things more precisely. In past centuries, the terms "bear market" and "bull market" were used loosely to describe periods of big market moves.
Some market analysts prefer other rules, which, of course, are a lot more complicated. Ned Davis Research, of Venice, Fla., doesn't even like to talk about bear and bull markets in volatile indexes such as the Nasdaq. Ned Davis maintains that the period of time during which the index moves is as important as how much it moves. A big move in a few days, obliterated a few days later, wouldn't count as a bull market. But a smaller move that lasted for months would count.
"In trying to interpret bull and bear markets in a longer-term context, simple 20% moves in a volatile index aren't that important," said Sam Burns, a research analyst at Ned Davis.
According to Ned Davis's definition, a 30% rise in the Dow industrials counts as a bull market (and a 30% drop as a bear market) if it occurs through 50 calendar days. On the other hand, a gain of only 13% in the Dow industrials would count as a bull market if it lasted for 145 days, Ned Davis maintains. The research firm also uses the broader Value Line Geometric Index as an indicator of bull and bear markets.
Still other experts think that it isn't really a bull market unless the index rises high enough to surpass the previous year's high. That would be hard for the Nasdaq to accomplish: Even after Wednesday's gain, it would have to more than double from here to reach 5048.62.
This isn't just theory. To see how it all can affect real investments, you need look back no further than the painful period from 1966 through 1982. During that 16-year period, the stock market went through no fewer than seven bear markets by Ned Davis's definition. In between came six bull markets.
To anyone who bought at the 1966 high of 995.15 on the Dow industrials, it must have seemed like one long, agonizing bear market. As late as 1982, the industrials traded as low as 776.92 -- a 22% loss over 16 years.
Was that one long bear market? Well, in a period of almost two years from December 1974 through September 1976, Mr. Burns noted, the Dow industrials put in a 75% gain, hardly something to ignore.
Bottom line: All of this analysis is meant to help people make investment decisions, not to set rules in stone. While the analysts say they can't make objective decisions without objective rules, "perhaps investing is more an art than a science," as Mr. Rubin puts it.
Write to E.S. Browning at jim.browning@wsj.com1 |
