There are two types of corrections and bear markets in the world of equities. For simplicity’s sake, I will use the commonly accepted parameters to differentiate between a bear market and a correction within a bull market.
A correction is when the market falls 5 percent to 20 percent. A bear market is when the market suffers more than a 20-percent fall from the most recent high. On the surface, it may seem we have a little bit of both right now, but let’s dive in and see if we can gain some clarity.
Here are the facts: After rising for more than 12 months from the March 2009 stock market bottom, the Standard & Poor’s 500 hit a high of 1,220 on April 23. The rest of the second quarter saw strong selling until the most recent low on July 2, which left the S&P about 17 percent below the April high. According to our agreed-upon parameters, this move describes a correction, not a new bear market.
But 17 percent in only 10 weeks? As I mentioned before, there are two types of corrections and bear markets: “wear ’em out” and “scare ’em out.” The second quarter was definitely “scare ’em out”. The October 1987 crash was a “scare ’em out” bear market. The 2000-2003 tech crash was a “wear ’em out” bear market with severe losses suffered over years instead of weeks or months. There was some serious selling in the fall of 1998 that some define as a bear market, but it was over so quickly that it fits in the “scare ’em out” category.
We are now four months removed from the most recent stock market top and we have already experienced the scare part of the move. The third quarter is a bit different in that so far the market is up for the quarter and selling hasn’t gotten out of hand. With that said, we are still at the same price we’ve been at for months, locked in some kind of pre-election trading range. It feels like we are getting the wear ’em stage now. The year 1994 was a lot like this. The market was down for the year with a lot of bouncing around on the way. That trading range set the final stage for what would become the greatest bubble in history. I doubt we have that kind of reward waiting for us, but we could certainly see some decent upside.
How much more wear will the market ask us to endure before resuming the rally that began July 2? For this answer, I will turn to another old Wall Street saw that goes, “Buy the rumor, sell the news.” There is speculation that a large group of stock-market-friendly politicians will be elected this November. I get this information from a website that has an excellent track record predicting election results. The site is www.intrade.com, and it handicaps outcomes using a system similar to the options market.
Intrade is currently saying there is a 73-percent chance Republicans will take control of the House in November, up from 51 percent only a few weeks ago. These are strong numbers, and the stock market should reflect this over coming weeks. Should you sell the news after waking up the day after the election if you see Intrade was right? That’s up to you, but probabilities suggest a good rally between now and then.
In summary, the market whacked investors pretty good in the second quarter but has switched to a more subtle punishment since then. I continue to believe the April 23 high was not the end of the bull market that began in March 2009 and, therefore, think we will see higher prices over coming months. It could be the election, although it could be something else. Either way, it seems to me stock prices will be higher by the end of the year.•
Hauke is the CEO of Samex Capital Advisors, a locally based money manager. His column appears every other week. Views expressed here are the writer’s. Hauke can be reached at 203-3365 or at firstname.lastname@example.org.