E A Major Bear Market Sign Is Developing

I’ve outlined some very dependable markers of bear turns now developing in our stock market in some recent articles.I don’t like being a such sour puss as I mainly like analyzing individual stocks and seeing them climb. All I ask of the market is to leave my individual stocks alone. A flat, boring market is my favorite. But sometimes there is such a concentration of downside risk, you have to take measures against a market intrusion.

A bear attack is looking likely. One of the many signs is the megaphone. And I don’t mean the device the Fed is holding up to its chin to say “everything is fine”, although that is a very good contrary indicator. The megaphone I am referring to is a technical formation. Like all good formations, they happen because of the human psychology involved in buying and selling.

We won’t do an exhaustive survey of all bear markets, and this sign doesn’t accompany all bears. But it has a strong tendency to accompany the really bad ones. Let’s start with an early US bad bear, the 1852-1857 sell down. This one doesn’t readily pop to mind when “really bad bears” are discussed. But a Wall Street Journal piece written March 6, 2009, three days before the bottom, discussing how ’08 stacks up in history, features it prominently. It pointed out that we had to fall way more in 2009 to catch up with the #1 fall in history, 1929-1932 (-83%) and the #2 fall, 1852-1857 (-66%) inflation adjusted. Of course, we didn’t do that in March of 2009, so the 1852 bear kept its # 2 all time ranking. So what did this bad one look like? 

That’s right – it looked like a megaphone. This technical formation is one that I look for in stocks, because they usually break violently to the upside, given other positive indicators, but not after a severe thrashing to the downside.

So #2 was a megaphone, what about #1? Well, sort of. The Crash of 1929 was just that – a crash. A bear market, which transpires over years, is not a crash. Thus the crash of 1987 was not a bear, and the crash in 1929 was not a bear. As I discussed in “A Study In Crashology” 1929 was just a big correction to an over bought condition (like 1987) but the fallout from this in the banking world caused the severe economic downturn, which was a bona fide bear. This was an exception to the rule that bull markets end with a wimper, not a bang. Bulls typically do a gentle roll over into a bear. So, how did all this look?