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Bear Market Analysis. Darker Days Ahead?
by Dr Joe Duarte
February 11, 2008
Bear Market Analysis
Darker Days Ahead?
The odds of the current correction being the start of a bear market are higher than most expect. In fact, one Marketwatch analyst says that a bear market is "about due."
John Prestbo, editor and executive director of Dow Jones Indexes, ran a statistical analysis of bull and bear markets since the Dow Jones Industrial average was established in 1896, which led him to come to the above conclusion.
Here are some of the interesting things he found:
1. "The five-year bull market that was either interrupted or ran out of steam on Oct. 9 lasted eight months longer than the post-war average. The bull appears at first glance to be significantly below average in strength, gaining 94.4% versus an average post-war bull run of 136%."
2. Yet, "if we remove the three giant bull markets of 1949-61 (up 354.8%), 1982-87 (a 250.4% gain) and 1990-2000 (395.7% higher) from the average, we get 61.8%. That would make the most recent bull more than 32 percentage points larger."
3. "The average bear market over the past 111 years sent the Dow down by 34.63%. The declines ranged from 53.57% on the deep side (1932) to the shallowest drop of 21.16% (1990). They lasted, on average, nearly 11.5 months, ranging from 36.55 months (1946-49) to 1.81 months (1987)."
4. "Bears are smaller and appear less often since World War II, though they last a bit longer. In those 63 years there have been 11 bear markets, 10 fewer than in the preceding 49 years. They lost 29.71% on average, ranging from 45.08% (1973-74) to that same 21.16% (1990). Their average length was 14.17 months, with a high of 36.55 months (1946-49) and a low of 1.81 months (in 1987)."
So putting a little math together here, based on Prestbo's analysis, if this is a bear market, which presumably started in October 2007, it could last 11.5 to 14.17 months, depending on whether it acts as bears did on average before, or after World War II, respectively. And the drop, based on the Dow Jones Industrial Average could be anywhere from 29.71 to some 35%.
That would put it ending somewhere in the November to December 2008 time frame, and the bottom would be somewhere around Dow Jones Industrail Average 9956.25 and 9206.55, some 15 to 20% below last Friday's close.
We don't know about you. But when we did those calculations, it took our breath away. Think about it, if this thing is another bear, and it just runs along average lines, based on past performance, it's only one half to one third finished, which means that a whole lot more pain could be on the way.
Oh yeah. It could be worse. Check this out. According to Prestbo, who gets our award for being Mr. Dark Knight "Sometimes, however, there are two or more bears in a row, with only a bit of bullishness in between to separate them. For instance, the Great Depression was marked by 12 bear markets, starting with the Great Crash-initiated retreat of 47.9% in 1929. That one wasn't the deepest, either. The honor goes to the previously cited 53.57% rout over four miserable months in 1932."
Wouldn't that be an interesting scenario? You bet, 12 bears in a row, would make life interesting for anyone in the White House, not to mention your house and ours.
Fear not, though. As Prestbo noted, it wasn't all bad. "Overall, the Depression's bears averaged Dow declines of 37.7%, with an average span of five years and three months. Separating them was the same number of bull markets that rallied an average 53.5% and lasted an average of five and a half years. But an average bear followed by an average bull still left the Dow lower."
And here's one for us market timers. "One Depression-era bull market was worthy of the name -- a 127.3% rally in 1934-37 -- but the others amounted to inconsequential hills in a deep, wide valley. The Dow didn't climb back to 1929 levels for 25 years, in 1954."
Conclusion
So what's Prestbo's conclusion? "All these numbers make one conclusion irrefutable: Bear phobia isn't paranoia. Bear markets really do maul portfolios. Investors are wise to avoid them if possible, just like hikers do with the real animals."
You bet baby. And here's ours, which we put forth in these pages on January 16th, 2008.
"Anyway you look at it, it feels like a bear market, even if the Fed pulls a miracle, things straighten out, and it turns out that we really aren’t in one. And, as the old adage goes, on Wall Street, it’s all about perception. Right now the perception is growing worse and worse with each down tick in each individual market. And, why not? If you take a bit of time to look around, you’re seeing charts that are in the midst of patterns that are tracing lower lows and lower highs, and support levels that are failing left and right. At the same time, the fundamentals of the U.S. economy are starting to show significant erosion, and the rest of the world may be starting to slow as well. In other words, this is one of those markets where the return of your money is a whole lot more important than the return on your money. Tread very carefully."
And what if we're wrong? Great, we'd love to be wrong, and to be buying stocks left and right, which is what we'll be doing if things turn around.
Until then, though, we'll be holding on to lots of cash, and trading currencies, gold, commodities, and bonds whenever the trend is sustained in any of those other assets.
Bear Market Analysis. Darker Days Ahead?
by Dr Joe Duarte
February 11, 2008
Bear Market Analysis
Darker Days Ahead?
The odds of the current correction being the start of a bear market are higher than most expect. In fact, one Marketwatch analyst says that a bear market is "about due."
John Prestbo, editor and executive director of Dow Jones Indexes, ran a statistical analysis of bull and bear markets since the Dow Jones Industrial average was established in 1896, which led him to come to the above conclusion.
Here are some of the interesting things he found:
1. "The five-year bull market that was either interrupted or ran out of steam on Oct. 9 lasted eight months longer than the post-war average. The bull appears at first glance to be significantly below average in strength, gaining 94.4% versus an average post-war bull run of 136%."
2. Yet, "if we remove the three giant bull markets of 1949-61 (up 354.8%), 1982-87 (a 250.4% gain) and 1990-2000 (395.7% higher) from the average, we get 61.8%. That would make the most recent bull more than 32 percentage points larger."
3. "The average bear market over the past 111 years sent the Dow down by 34.63%. The declines ranged from 53.57% on the deep side (1932) to the shallowest drop of 21.16% (1990). They lasted, on average, nearly 11.5 months, ranging from 36.55 months (1946-49) to 1.81 months (1987)."
4. "Bears are smaller and appear less often since World War II, though they last a bit longer. In those 63 years there have been 11 bear markets, 10 fewer than in the preceding 49 years. They lost 29.71% on average, ranging from 45.08% (1973-74) to that same 21.16% (1990). Their average length was 14.17 months, with a high of 36.55 months (1946-49) and a low of 1.81 months (in 1987)."
So putting a little math together here, based on Prestbo's analysis, if this is a bear market, which presumably started in October 2007, it could last 11.5 to 14.17 months, depending on whether it acts as bears did on average before, or after World War II, respectively. And the drop, based on the Dow Jones Industrial Average could be anywhere from 29.71 to some 35%.
That would put it ending somewhere in the November to December 2008 time frame, and the bottom would be somewhere around Dow Jones Industrail Average 9956.25 and 9206.55, some 15 to 20% below last Friday's close.
We don't know about you. But when we did those calculations, it took our breath away. Think about it, if this thing is another bear, and it just runs along average lines, based on past performance, it's only one half to one third finished, which means that a whole lot more pain could be on the way.
Oh yeah. It could be worse. Check this out. According to Prestbo, who gets our award for being Mr. Dark Knight "Sometimes, however, there are two or more bears in a row, with only a bit of bullishness in between to separate them. For instance, the Great Depression was marked by 12 bear markets, starting with the Great Crash-initiated retreat of 47.9% in 1929. That one wasn't the deepest, either. The honor goes to the previously cited 53.57% rout over four miserable months in 1932."
Wouldn't that be an interesting scenario? You bet, 12 bears in a row, would make life interesting for anyone in the White House, not to mention your house and ours.
Fear not, though. As Prestbo noted, it wasn't all bad. "Overall, the Depression's bears averaged Dow declines of 37.7%, with an average span of five years and three months. Separating them was the same number of bull markets that rallied an average 53.5% and lasted an average of five and a half years. But an average bear followed by an average bull still left the Dow lower."
And here's one for us market timers. "One Depression-era bull market was worthy of the name -- a 127.3% rally in 1934-37 -- but the others amounted to inconsequential hills in a deep, wide valley. The Dow didn't climb back to 1929 levels for 25 years, in 1954."
Conclusion
So what's Prestbo's conclusion? "All these numbers make one conclusion irrefutable: Bear phobia isn't paranoia. Bear markets really do maul portfolios. Investors are wise to avoid them if possible, just like hikers do with the real animals."
You bet baby. And here's ours, which we put forth in these pages on January 16th, 2008.
"Anyway you look at it, it feels like a bear market, even if the Fed pulls a miracle, things straighten out, and it turns out that we really aren’t in one. And, as the old adage goes, on Wall Street, it’s all about perception. Right now the perception is growing worse and worse with each down tick in each individual market. And, why not? If you take a bit of time to look around, you’re seeing charts that are in the midst of patterns that are tracing lower lows and lower highs, and support levels that are failing left and right. At the same time, the fundamentals of the U.S. economy are starting to show significant erosion, and the rest of the world may be starting to slow as well. In other words, this is one of those markets where the return of your money is a whole lot more important than the return on your money. Tread very carefully."
And what if we're wrong? Great, we'd love to be wrong, and to be buying stocks left and right, which is what we'll be doing if things turn around.
Until then, though, we'll be holding on to lots of cash, and trading currencies, gold, commodities, and bonds whenever the trend is sustained in any of those other assets.
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