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Anatomy of a True Bear Market

CAMS Weekly View from the Corner – Week ending 8/5/2022

August 8, 2022

Over the previous year we have offered the phrase “true bear market” within numerous editions.  This type of market description is simply an in-house reference to a stock market that is in a long term downward adjustment process that unfolds over many months to years.  A true bear market is a grinder type process whereby every time the consensus is convinced the market is done with its southbound adjustments it finds a way to move lower yet again. This process walks many into unknowing bull traps that only makes the process more damaging.  The bull trap is simply a description whereby investors become convinced no more downside is possible and consequently move more capital into the market to capture the “low prices.”  Given time, in the true bear market process, said investors realize they were mistakenly bullish (expecting tremendous upside) only to discover they were “trapped” (or faked out) as the market finds a way to go lower and lower.  Repeat this process enough and serious financial problems unfold for said investors.  The Bull Trap Antidote The antidote for this is to first start with a firm awareness of market history.  Being a student of history takes time of which most do not possess but what can be inserted in lieu of this is mental flexibility.  Simply knowing that market history is loaded with true bear market experiences and with this adopting a flexible mindset that allows for a healthy skepticism of any upward move off beaten down low points is important. Admittedly the above is a tremendous oversimplification of a complicated process but we need to drill down to the bottom line as briefly as possible for these relatively short editions.  Mental flexibility rests at the core of a bull trap antidote.  When participating in markets it is always your psychology that gets you, or conversely, keeps you out of harm’s way. A Historical Reference Below we share a historical visual of the above general storyline courtesy of Ron Griess over at the Chart Store.  It takes us back to the early spring of 2000 and walks us through to late 2002.  This is nearly three years of an overall down trending stock market (S&P 500) as highlighted with our overarching red arrow.  This represented a 47% loss in value for the S&P 500 Index in those years.  That is a lot of time and a lot of pain.  (For context the worst reading for the S&P 500 in 2022 was negative 23%) The orange stair stepping lines highlights the process of give and take.  To narrate: The market goes down, steadies, moves upward (bull traps) for X timeframes while consistently offering relief rallies of 10-24% (this must be the end – it is all good again right!) each time only to then move lower and yet again, finds a lower low.  (For context our current relief rally stands at 13%) Therein lies a plethora of bull traps which is what true bear markets do – they trap the newfound bulls (i.e. those holding mental conviction) showing them time and again that we are in a true bear market that places a wealth of damage onto stock prices and takes a long while to do so.  Worse, while unfolding (especially in today’s socioeconomic backdrop) price inflation wreaks even more damage onto the individual’s capital further adding to the losses when accounted for in actual purchasing power.  Painful.  That is the untold story of true bear markets in that actual losses are one thing but the “thief in the night” of price inflation only adds to the actual losses as told through the loss of purchasing power.

Nothing Good Happens After Midnight You probably heard the phrase in your youth and then stated it as a parent.  The old adage, post midnight, offers you do not receive celebratory news at that part of the daily cycle. Similarly markets offer their own version of this (our side take of it at least) and that is nothing good happens south of the 200.  The 200 day moving average whereby the average price of the previous 200 trading sessions is computed with each passing day and through this creates a moving average.  This is very simple in that if an asset price is lower than the average price of the previous 200 trading sessions you clearly have an investment that is not thriving.  Even worse, when the 200 day average itself is trending downward you know said asset is in poor overall health.  Additionally, when the investment has an established down trend line along with the above 200 storyline you have additional confirmation of poor health. Current day, our stock market has all of the above.   We have annotated the chart below and will let it speak for itself.  Click for a larger view if necessary.  By-the-way, if curious what the above historical storyline looked like through the lens of its 200 day average line back in the early 2000’s take a peek:

Click For Larger View:

Maneuvering Through True Bear Markets With mental flexibility in hand our focus in true bear markets is to sidestep the negative downside movements and then to X degree participate in the upward relief rallies.  With this we remain whole as best we can by sidestepping notable downside and then attempt to judiciously tack on some positive return in said relief rallies.  This process strives to also make up for that thief in the night loss that price inflation silently inflicts on an investor’s capital. For our part, thus far in this market environment we have been able to do this generally speaking.  As stated ad nauseam the epicenter of this is to hold a mentally flexible mindset rather than a predetermined conviction that X will occur without question in the overall markets. At this stage it appears ever more likely that we began a true bear market beginning 2022 and with this, per our first chart, it is wise to understand how such bear markets can grind lower over time surprising the masses with each leg down.  We invite you to an open mindset with true bear market history in mind while viewing our current stock market reality.  For our part we are immersed in such a mindset while we navigate this difficult environment that may be lasting far longer than most think possible. I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis


H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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