The bear market in US stocks may have ended at its mid-June low. Or it’s only half over. And if the second half of the bear market is still ahead, the biggest losses may or may not be yet to come. You can take my word for it.
The reason for pointing out these otherwise trivial truths is to counter Wall Street’s endless attempts to dismember market data. Most of these attempts amount to little more than statistically suspect data mining, revealing more about the analyst doing the mining than the market itself.
A number of recent social media posts have argued that the worst of the bear market is yet to come. The implication is that bear market losses are typically back-end-loaded, with bear markets ending on a crescendo rather than a whimper.
This way of thinking has two flaws. First, the average it’s based on is calculated from a small sample, since (thankfully) there haven’t been many bear markets in US history. Therefore, any conclusions must remain tentative at best.
Consider the 11 bear markets since 1980 in Ned Davis Research’s Bear Market Calendar. Four of them, the Dow Jones Industrial Average DJIA, lost -0.18% more in the first half than in the second. So while it’s true that the average bear market has “backloaded” its losses, it’s a slim bet to bet that this will continue to be the case in the future.
The second, more fundamental flaw in this line of thinking is that it is based on an unspoken yet crucial premise – that the current bear market is still in its infancy. But we do not know exactly this premise.
It is true that the Dow lost more in the second half than in the first during the nearly six-month slide from the market’s January high to its mid-June low. However, that doesn’t tell us whether the bear market is over or has a long way to go.
Closer to the end
There is one aspect of this thinking that I think is more significant: it indicates a clear shift in tone among analysts. In contrast to previous analysis, which essentially attempted to put a bullish tone on the market’s losses, the tone is rather dovish. Instead of concluding that the worst is behind us, we are now being told that the worst is ahead.
This shifting sentiment suggests that we are further along in the five stages of bear market mourning that I have discussed in previous columns. As late as July, I was assessing sentiment on Wall Street in the third of these five phases—negotiation—with depression (phase 4) and acceptance (phase 5) still to come. The bearish sentiment beginning to dominate social media is typical of mourning in Stage 4 – which, from a contrarian perspective, means we are closer to the dying breath of the bear market.
We’re not there yet, so it would be premature to celebrate this recent bearish turn. The market has yet to face this emerging depression and then go through the acceptance phase. For these and other reasons, I believe we are in a bear market rally and breaking the June lows.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected]
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AAlso read: Whatever you’re feeling about stocks now, it’s normal bear market pain — and the worst is yet to come