3 Psychological Phases of a Bear Market
Dow Theorist Richard Russell on the psychology of Bear markets:
1) The first phase is the one where the bear market wipes out the optimism and excitement which existed at the preceding bull market’s top. I believe we are in the first phase of the bear market now.
2) The second phase of a bear market is usually the longest phase. This is the phase where it gradually dawns on stock holders that business is deteriorating and that we are moving into hard times. I believe we are now close to the second phase.
3) The third phase of a bear market is the “throw ‘em in” phase where stocks are sold for no other reason than that the sellers need to raise cash.
During the latter part of the third phase, blue-chip stocks will sell “below known value,” and dividend yields on top-quality blue-chip stocks will climb above 6% or more. Investors will turn black-bearish, and we will hear opinions such as “This is the end of capitalism,” and “The nation may not survive.” As a pure guess, I think that if or when the Dow breaks below its March 9, 2009 low of 6547.05 (and I think it will) that will mark the end of the second phase of the bear market and the start of the third phase.
June 3, 2010
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June 4th, 2010 at 10:59 am
@BR-
Thrilled to see you reference Russell again. David Rosenberg was in article on CNBC’s website yesterday referencing Bob Farrell. His observations are pasted below. Although I believe CNBC is a captured network, I have great respect for Rosenberg and for you I might add. Comments?
Excerpt-
He referenced legendary analyst and investor Bob Farrell’s 10 Market Rules to Remember, particularly citing Rule 8 which says bear markets run in three cycles: a sharp downturn, a reflexive rebound and “a drawn-out fundamental downtrend.”
“The sharp down was the 57% slide from October 2007 to March 2009. The reflexive rebound was the 78% runup from March 2009 to April 2010,” Rosenberg said. “And, Stage 3, the re-emergence of the fundamental downtrend, in classic Carpenter fashion, has only just begun.”
Curious
June 4th, 2010 at 11:00 am
Interesting piece, Barry – and your suggestion that the March ’09 low will be taken out is uncharacteristically candid.
Must’ve had your Wheaties this morning…
June 4th, 2010 at 11:02 am
Looks to me like it’s astrologist… er… a… chartist Russell who said the Dow drops below the March ’09 low.
June 4th, 2010 at 11:04 am
Richard Russell has been quoted a lot as of late, but from what I can find on the web about his track record he seems to be more broken clock that market oracle. What’s your opinion of his track record?
thanks
June 4th, 2010 at 11:26 am
I haven’t checked lately, but Hurlburt used to have Russell rated as one of the top performing newletters in the long-term.
June 4th, 2010 at 11:30 am
Correction to earlier comment: Hulbert, not Hurlburt. Sorry, Mark.
June 4th, 2010 at 11:38 am
Who are you going to trust, Richard Russell, or Ben Bernanke? Neither has a perfect track record… I think Russell’s record is better.
Here’s a video with some timely portfolio advice, if you read between the lines.
http://www.youtube.com/watch?v=KgcTHf3tbtc
June 4th, 2010 at 11:47 am
Ok no doubt people “throw in the towel” at bear market lows.
But what does that look like from a valuation perspective? I would keep a little mental flexibility on that point given what may be a new low interest paradigm in the industrialized world. Therefore the old 6% dividends+ book value fire sales might be a replaced by a less dramatic valuation low.
Who can say what that might be.
Reminder, we did have a pretty substantive purging in late 2008/ march2009. Could the lows be in? I think they are.
June 4th, 2010 at 11:52 am
I believe that the March 2009 low in the S&P 500 establishes a new generational low in the S&P, replacing the previous generational low in 1974. No meaningful drop (more than a couple %) below the March 2009 low.
Oh oh … here comes the brickbats!
June 4th, 2010 at 11:53 am
Hi Barry.
I consider myself a pretty above average, nice, smart guy compared to most ass holes I deal with on
a daily basis. There is an investing question that I can’t seem to find an answer to. What I got going for me
is your audience is the right forum for my question. Here goes– I have money in an IRA. If I knew that
3 months from know the dow or d&p would be 15% lower than where it is today how could I capture that
move? (please no stupid answers like the sds and twm- also, I realize I can’t short in an IRA account).
Sincerely,
Nolan’s Dad
June 4th, 2010 at 12:09 pm
NolansDad Says:
June 4th, 2010 at 11:53 am
I have money in an IRA. If I knew that 3 months from know the dow or d&p would be 15% lower than where it is today how could I capture that move?
reply:
————
Move to cash. Wait. Buy back in at the lower point you expect to see. This is called “buy low sell high.”
Preservation of capital is more important than anything else. There’s always another dip and recovery that will come along.
June 4th, 2010 at 12:14 pm
Interesting piece, Barry – and your suggestion that the March ‘09 low will be taken out is uncharacteristically candid.
—–
BR isn’t suggesting this, at least above, he’s merely passing on Russel’s thinking. That said, I would like to KNOW BR’s thoughts as long as he feels it important enough to pass on Russel’s.
June 4th, 2010 at 12:19 pm
@Nolans: Buy TLT and be happy with your small yield in a deflationary environment. Treasuries (for a while) are the least bad among the worst. I’ve been backing up the truck on that one since it was in the high 80′s.
June 4th, 2010 at 12:22 pm
Yeah, my bad. BR plays his cards close to the vest.
So how about it, BR? Want to comment on Russell’s opinion that the 3/09 low will be taken out, and on what stage of the bear mkt we may be in?
C’mon – stick your neck out for a change.
June 4th, 2010 at 12:26 pm
Move to cash ASAP, Gold is up today despite the massive sell-off which is a telling signal.
I fear this is gonna get very very bad. Not sure the banks and Central Banks can prop this thing up much longer.
June 4th, 2010 at 12:31 pm
NolansDad, there are multiple ETFs that short the market. For example PROSHARES ULTRASHORT EUROPE, symbol EPV. Good-luck with whatever you do. :)
June 4th, 2010 at 12:31 pm
I agree with Deadhobo. Go to cash and wait for bargains. If you want to roll the dice you could go to an ETF like SH, but you might get your ass waxed by irrational investors and/or government intervention. The market doesn’t seem to work as freely as it used to.
June 4th, 2010 at 12:47 pm
@ NolansDad:
I say this only half-jokingly but in a sincere and altruistic sense: If you deal with “assholes on a daily basis,” perhaps you should invest in such a way that gets you away from the “assholes!”
I don’t know you, and I will not assume this describes you, but your comment hints at a broader story told by millions of people who live a daily life they hate while dutifully saving in their retirement accounts so they may one day find “financial freedom.”
For these people (and you, if it applies), I suggest a “long you, short the crowd” approach. Perhaps you could go completely against conventional thought, cash out your IRA, and use the money to begin something you’ve always wanted to do… The greatest risk is not to take the risk…
“It belongs to the imperfection of everything human that man can only attain his desire by passing through its opposite.” ~ Soren Kierkegaard
http://www.thefinancialphilosopher.com/2010/05/long-you-short-crowd.html
June 4th, 2010 at 12:56 pm
Great thoughts, Kent.
June 4th, 2010 at 1:23 pm
Clearly, Russell doesn’t read the comments at TBP. If he had, he would have seen that we went through Phase 3 from March-June 2009. Remember when BR’s readers almost ate him alive for the crime of suggesting that it wasn’t entirely silly to suggest that Bernanke’s “green shoots” could be real?
June 4th, 2010 at 1:50 pm
Earth to f411: it’s not ’09 anymore and the economy is flat-lining, so your hero’s green shoots are turning brown. Wake up.
June 4th, 2010 at 1:55 pm
It all sounds very much like a depression to me!
June 4th, 2010 at 1:57 pm
You sending another check into your IRA, frankie? Catching a falling knife perhaps?
June 4th, 2010 at 1:57 pm
the comments are far more informative than the chart.
June 4th, 2010 at 1:59 pm
@Mannwich
Quoting BR:
“Before we take a closer look at the details, a caveat: Regular readers know I don’t think much of the monthly NFP data. Identifying the precise monthly changes in a 143 million person labor pool is essentially an exercise in futility: Too much noise relative to signal gets run through a subjectively flawed model, subject to large, revisions to correct the consistent tracking error. What comes out of this sausage factory is little more than a rounding error.”
There is no meaningful difference between 150,000 private sector jobs and 50,000 private sector jobs in any single month in an economy with a 143 million person workforce. The trend is what matters, and the trend in employment patterns since February 09 is definitely improvement.
June 4th, 2010 at 2:21 pm
@d4winds: Really? And just what exactly would a miniscule total of 23 comments be tell you, pray tell?
June 4th, 2010 at 2:28 pm
Interesting thoughts & agree generally with your intermediate – long-term outlook. the questions is what happens in the near-term? the market is VERY oversold and due for a bounce. all you need is some positive commentary from China policymakers re: real estate and you easily get a 10% rally in markets (and probably more from cyclicals). Can’t press shorts here..
June 4th, 2010 at 2:42 pm
Damn! I knew I shouldn’t have sold that Dow 10,000 hat at the garage sale.
June 4th, 2010 at 2:50 pm
Thank you for that, Kent the Philosopher. I think I know what I want inscribed on my headstone now.
Well, that and a silhouette of Salma Hayek. If my wife won’t mind.
June 4th, 2010 at 2:54 pm
Be my guest f411. Throw more of your money at the market and down the drain if you’re so confident of this “recovery”.
June 4th, 2010 at 3:00 pm
“the market is VERY oversold and due for a bounce”
I don’t disagree, but when markets crash they generally do so from an oversold condition, do they not? Best to tread lightly here, not adding shorts but not going long either. One of these days instead of going from bad to better the market’s gonna go from bad to worse.
@Mannwich: feeling a bit feisty today? Keep it up – you’re one of my favorite posters.
June 4th, 2010 at 3:13 pm
@drey: Just a little. Can you tell? ;-)
June 4th, 2010 at 3:15 pm
anyone else follow RR? he’s turned extremely bearish the last couple of weeks, and his writings have gotten dark.
His PTI has been interesting lately. During the Jan-Feb sell-off it remained quite bullish and never really fell, this time, it moved very quickly from a bullish 70 to hanging by a thread at this point.
RR has been around forever, quite a life story of how he ended up in markets as well.
June 4th, 2010 at 10:57 pm
These are the three phases,
1) Oh
2) Shit
3) Fuck!
June 5th, 2010 at 1:26 am
@F411 1:59 pm
rather than quibble over numbers, I prefer pictures …
http://www.chartoftheday.com/20100604.htm?T
And while clearly the stock market can part ways with the economy for lengthy periods of time, I believe (this is an article of faith with me) that over the long haul, the two will come to sing from the same songbook.
And when you’re looking at job losses of this magnitude, that song is likely to be a funeral dirge. Without jobs there are no incomes, and without incomes, there is no money to spend, and without money to spend there is no economy.
In nearly all recoveries, the employment is the last thing to kick in, and it is employment kicking in that makes the difference between a failed recovery and a real recovery. You can juice the stock markets with stimulus, and even the economy a bit … but stimulus, like fame, is fleeting — and if the spark is insufficient to ignite the economy and produce real job growth (and I’m talking several months of non-census, real jobs being created, in the same range of 700+K per month that we lost as we headed into the storm), then we fall back and pay down debt and do whatever it takes to build financial security and confidence. Maybe go to war, that seemed to do the trick in getting us out of the Great Depression, creating a huge market for replacement stuff, and leaving us with pretty much the only industrial machinery capable of making “stuff”.
Given the mountain of debt that faces us, it will take at least a decade (perhaps three decades) of wandering in the wilderness before we can see another bull market in the economy as well as in the stock markets.
There’s a really good slideshow you ought to take a peek at …
http://www.businessinsider.com/50-statistics-about-the-us-economy-that-are-almost-too-crazy-to-believe-2010-6#in-2010-the-us-government-is-projected-to-issue-almost-as-much-new-debt-as-the-rest-of-the-governments-of-the-world-combined-1
June 5th, 2010 at 3:31 am
@F411: Agreed. I think these 3 phases have already taken place. I distinctly remember CAT, WAG, etc. trading ‘below known value’ back in the lows of Dow 6547.05. And I am done throwing money at the market. Did that already in a greedy attempt to milk the recovery. Needless to say that didn’t work out to well but most of my gains since the lows are still intact. 100% cash for now. I am rookie; these mistakes should be a valuable learning experience.
However, I do think we’re in for another bear at some point when we realize the ‘green shoots turn brown’ as Mannwich said. Also, there eventually needs to be a decrease in govt spending and restoration of some kind of fiscal conservatism. I don’t know how the hell we will accomplish that, considering we are the biggest debtor nation and politicians simply spend to buy votes. Lack of accountability for spending disgusts me. I can’t foresee that NOT catching up to us in the future.
Rookie here. I really enjoy the blog and all the comments. Fancy I will join in.
Cheers.
June 5th, 2010 at 7:43 am
thanks for the LOL constantnormal on that 50 Ways to Leave your Lover .. had to come back after #1 – who brought Ben outta the air and gave him the pumper truck controls – put him on the front line with the hose – right next to the fire
June 5th, 2010 at 8:02 am
back from the 50 .. wow .. I’ll repost this of mine over at HuffPo:
overbuild > repossession > retracement > rebalance > rebirth = the system lives on
overbuild = populations and the stuff for them
system = our American version of cannibalism .. duh sorry meant . cap..it..alism
is this thing on?
June 5th, 2010 at 8:38 am
After skeptically watching the market advance by almost 100 percent from the 2003 lows, Richard Russell finally turned all-out bullish in April 2008 with the S&P500 above 1,400. So said Mark Hulbert in a Market Watch column:
“Russell Now Says Bull Still Alive” (Apr 9, 2008):
http://www.marketwatch.com/story/richard-russell-is-forecasting-epic-bull-market-in-stocks
Let’s hope his clients entered the 6 percent stops that Russell recommended at the time.
June 5th, 2010 at 11:21 am
[...] 3 Psychological Phases of a Bear Market. The Big Picture [...]
June 5th, 2010 at 11:39 am
@Nolandsdad;
There are many ways to make money from a falling stock market. Problem is that most of them will burn you pretty badly if it turns out that the market is heading up instead. If you have to ask I suggest that you will be much better off not getting into some alphabet soup that you know nothing about. At least get some experience by using small bets (that you can afford to lose). Also remember to use stops, set a limit for how much it can go in the wrong direction before you take a small loss now rather than risking to wipe out your investment by hanging on all the way down. The idea of going more into cash when you think the market is heading down is probably the best, because at least that will not lose the principal (only the potential gain). Always ask yourself the question: “what will happen if I am totally wrong” – remember it is your retirement that is at stake.
June 5th, 2010 at 12:19 pm
“As a pure guess, I think that if or when the Dow breaks below its March 9, 2009 low of 6547.05 (and I think it will) that will mark the end of the second phase of the bear market and the start of the third phase.”
I assume that he expects the S&P500 to break below the “devilish” 666 level as well?
Awesome…I can’t wait to buy AAPL at $70…especially considering that they currently have about $25/sh in net cash on their books. That would put their P/E at around 4.
“Pure guess,” indeed. Idiot!
June 5th, 2010 at 8:56 pm
for whatever it’s *Worth, and, from your perspective, whatever this:
” Kent @ The Financial Philosopher Says:
June 4th, 2010 at 12:47 pm
@ NolansDad:
I say this only half-jokingly but in a sincere and altruistic sense: If you deal with “assholes on a daily basis,” perhaps you should invest in such a way that gets you away from the “assholes!”
I don’t know you, and I will not assume this describes you, but your comment hints at a broader story told by millions of people who live a daily life they hate while dutifully saving in their retirement accounts so they may one day find “financial freedom.”
For these people (and you, if it applies), I suggest a “long you, short the crowd” approach. Perhaps you could go completely against conventional thought, cash out your IRA, and use the money to begin something you’ve always wanted to do… The greatest risk is not to take the risk…
“It belongs to the imperfection of everything human that man can only attain his desire by passing through its opposite.” ~ Soren Kierkegaard
http://www.thefinancialphilosopher.com/2010/05/long-you-short-crowd.html ” .. is *Worth; One should consider the Dynamic that is being broached.
and, to separate myself from those ‘qualifiers’, if You, actually,” give a whit” about, really, anything, You would do, much, more than, merely, ‘consider’ it..
http://www.thefreedictionary.com/whit
with that, “We” may (re-)discover our ‘inner Whig’, or not..YMMV, YOMP (yes, Your Orbit may Perturb)
http://encyclopedia.thefreedictionary.com/Whig+(American+Revolution)
June 5th, 2010 at 9:00 pm
and, w/this: “I can’t wait to buy AAPL at $70…especially considering that they currently have about $25/sh in net cash on their books. That would put their P/E at around 4.”-type of ‘thinking’–from, obviously, the “Gozinta” *School, *We can be sure of ‘plenny ‘O Bid’ to provide backdrop for, much, serious Fading..
June 6th, 2010 at 4:14 am
@CONSTANTNORMAL, sure, any serious examination shows fundamentals to be bad. More people will live in less housing because of the many jobs lost-WHICH ARE SIMPLY NOT TO BE RECOVERED! Factory jobs will not come back from overseas, tech work sent to India will stay there or next be shipped down to Burma (haha). Low housing demand=little construction demand. Declining wages=declinig spending=declining commercial profits
To someone above, a P/E ratio of 4 may not signal a good buy necessarily. Cash can vanish quickly. You should cash out and buy RMB thru a HK broker(doable), futures prices are reasonable.
My view is also that 3rd phase has not hit yet. Just watch the big states, Calif, NY respond to huge deficits. I haven’t even seen a good guess as to the number of jobs, government jobs, that will be lost. How will those people consume while jobless benefits are nearly done?
AND, since we are not growing business employment by capital creation, the government payroll decline will cause blood to flow. I try to be hopeful, but I don’t see any miracles in the next 3-5 years.