Still Mauled by the Bear Market

by Inya Ivkovic, MA

In the past three months, stock markets have gained anywhere from 35% to 40%. For example, the Dow Jones Industrial Average gained almost 35%, while the more popular on the trading floors, the S&P 500 Index, has gained almost 40%. But regardless of what traditional measures may quote as a bull market taking over, many analysts believe we are still being mauled by the bear. Many market veterans are warning us not to be fooled by rallies off the March 2008 lows. True, this surge of 35% technically fits the definition of a bull market, but those seeing the bigger picture fear otherwise.

The reason market pros are not convinced we are in a bull market is that the market hasn’t really been tested yet. A bull market would have been tested if able to endure a pullback over a period of time. But so far, we haven’t seen a major pullback yet, just occasional dips due to profit-taking. What would be considered the real test? Pulling back down to early March lows without dragging other markets and the overall economy down as well.

The traditional definition of a bull market clocks it once stocks are up 20% from their recent lows, while a bear market steps in once stocks decline 20% from the recent highs. So, if the Dow and S&P 500 have gained 35% and 40%, respectively, which is well over the 20% mark, why would this not be a bull market?

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The rub is that there is nothing traditional about current markets and the overall economy. Bear in mind that, while stock indices have rallied off their 12-month lows hit back in March 2008, they are still way off the October 2007 levels, when the markets actually imploded. If we use October 2007 as the real gauge, both the Dow and S&P are still down about 40%, while the NASDAQ is down about 36%.

In other words, how you trade these days will depend a lot on your investment horizon. If you are a short-term trader, undoubtedly, this market has definitely turned bullish. But if your horizon is longer, it would be wise to operate under the assumption that the bear market is still very much in power.

In fact, bad news bears believe that the bear market is now about a decade old and that it eerily resembles the stealth bear market of 1966 to 1982. In 1966, the Dow first tipped over 1,000 points and, for the next 16 years, it offered investors precious little in the form of returns. Sure, there were rallies along the way and short-term traders were often confused into believing the bull market may have returned. But, for 16 years the Dow had very much difficulty hitting that 1,000 points milestone again.

Technical analysts following longer-term trend lines (60-month and 80-month) still view stock markets within the bear market context. They also acknowledge that, along the way, there is plenty of room for rallies up these bearish trendlines. The key is not to confuse a bear market rally with a bull market, even if it surges over 20%, the traditional trend reversal point.