Bull and bear markets are different animals, and they need to be treated differently.
Knowing which market you are in is one of the most helpful pieces of information an investor can have. Realizing there are no absolutes in this business, we have to rely on an array of tools and indicators to help us reach a determination. We then have to hope that this “weight of evidence” approach proves as reliable as it has over the last 200 years.
In a bull market, when was the last time that, after a week or two pullback, investors ran around yelling that much lower prices were on the way?
Oil is the only market I have seen where that happened, and that’s because everyone except OPEC hates high oil prices. It never has happened in stocks. And yet, in a bear market, the reverse happens every few months.
When stocks are in a bear trend, as they are now, there typically are weeks to months of consistent selling, followed by a few weeks of a snap-back rally. During the temporary bounces, the overwhelming majority of experts declare that the bottom has arrived.
Since this bear market began in October, there have been four bottoms lasting a few weeks or more, the latest being July 15. In the three previous cases, everyone told you we’d reached bottom, but then the market fell to fresh lows. I don’t think this time is going to be different.
Another signpost is volatility. Equity markets are less volatile during bull markets than bear markets. The last five years demonstrate this point perfectly. From 2003 until October 2007, the CBOE Market Volatility Index averaged around 16. The average during the past 10 months has been around 21. Higher numbers signify higher volatility.
In addition, the Dow Jones industrial average has had eight days during the last 12 months where it has gone up more than 300 points. In the prior bear market, from 2000 until March 2003, this happened 16 times.
You might expect that 300-point up days are common in bull markets, but that’s not the case. In the bear run from 2003 until a year ago, there were none! You know you are in a bull market when prices progress steadily up.
Here’s another trick: One of the most reliable indicators of a major turn is price moving to a new level (either new high or new low) and a vast majority of indicators not following to that same level.
As the last bull market came to an end, there were three runs to new highs-in June, August and October 2007. The indicators peaked in either June or August, and they were sharply lower by the time the market peaked in October. In each of the sell-offs of the last year, the indicators have matched the price moving to new lows, including July 15. No positive divergences.
The weight of evidence is speaking loud and clear. At some time in the future, your map will tell you to change direction. But for now, global equities are still in bear territory.
Hauke is the CEO of Samex Capital Advisors, a locally based money manager. Views expressed here are the writer’s. Hauke can be reached at 203-3365 or at email@example.com.