Is this the 2012 Bear Market? (part 3)

Is this the 2012 Bear Market? (part 3)

 

In part 1 we said that we could evaluate whether a Market was a Bull or Bear depending on the:

 

  • Market Character
  • Signals
  • Price Action

 

In Part 3, we’ll reveal some of the usual technical signals associated with the warning of an impending Bear…..or the confirmation that we’re in one.  

 

  • The Death Cross is a very common signal that more and more investors have tuned into these days as the financial media starts to educate the public. It’s defined by a shorter-term moving average crossing down over a longer-term moving average; usually these are the 50 day and 200 day simple moving averages, although there is no one “set’ definition of the Death Cross.

 

In practice it can provide a good objective signal providing a distant warning of an approaching Bear, as this signal did in December of 2007: (red = 50dma, green = 200dma)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Like any moving average crossover system, though, it’s prone to false signals. Here’s an example of a much-publicized “death cross” in the summer of 2010 that did not pan out:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

So here we are in the third quarter of 2011, and we once again have the feared “Death Cross” signal:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What can we conclude from this signal? Just because we currently see the Death Cross in play on the S&P500 doesn’t automatically place us in “Bear Market” territory, it just adds another objective signal onto our analysis. Seeing the signal improves the odds that the Bear has begun, however.

 

  • The 20% Haircut – one of the key criteria about whether a Market is in a Bear is seeing a 20% distribution – or greater – off of recent Bull Market highs. 

 

The two last Bear Markets that we’ve experienced blew these readings away with distributions of 51% in the 2000 – 2003 Bear, and 58% with the 2007-2009 Bear. When the Market is truly in a Bear Market, there is no where to hide and it’s quite obvious….however the strongest drops come near the end of the cycle. Again, this is why it’s so difficult to identify the Bear early on, as a simple correction in a Bull Market may be falsely interpreted as the start of the Bear. Witness the 2010 correction of 17.2% on the S&P500; many had erroneously figured that to be the beginning of a new Bear Market, but we saw a 36% rally tacked on after that distribution, many on the backs of “weak hand” Bears that wrongly shorted the Market at the wrong time.

 

And where are we now after the recent panic? The July/August 2011 distribution left the S&P500 down 19.6% from its May 2011 highs – so far, just a correction.

 

  • The “Shot Over the Bow” Signal – another signal that doesn’t necessarily come with an indicator or measurable metrics. All Bear Markets start with a panic distribution from new highs in a Bull Market.

 

Prior to the Tech Bubble crash, we saw a clear signal “shot over the bow” that warned of instability approaching:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

And again in 2007, the upcoming Bear announced itself several months ahead of time:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

You can also clearly see that the summer of 2011 has brought with it its own “shot over the bow” move with the panic of the US downgrade.  This by itself does not confirm a Bear Market, but it becomes one more data point to put on the pile of evidence to stack the odds in your favor when you make your read. 

 

In Part 4, we’ll discuss the Price Action that can warn us of the approaching Bear, or confirm the fact that we’re in one. 

 

Doc Severson

 

About the Author Brian Keith

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