Are stocks in the late stages of a bull market rally, in a bear market rally, rolling over, or getting ready for another leg up? Regardless of the actual state, the conclusion and outlook seems to be basically the same.
Are we in a bull market, bear market, or go nowhere market? I guess we can all agree that we are in a rigged market, but that doesn’t answer the question. A bit more research may help though.
According to Lowry’s, bull markets historically last an average of 39 months. Assuming that the March 2009 low at S&P 666 was the beginning of a new bull market, it was 37 months old at its April high of 1,422. If that bull is still alive, it’s 40 months old today. The bull is old and gray (perhaps already bald).
Although the S&P gained 113% from March 2009 – April 2012, there’s one problem with categorizing the rally from the March 2009 low as a bull market.
Since 1940 no bull market has ever experienced more than one decline of 10% or more. The alleged post 2009 bull saw two major declines. One in 2010 (-17%) and another in 2011 (-21%). Make it three (-11% from April – June 2012) if you consider the bull is still alive.
Statistically (using the commonly accepted 20% decline equals bear market rule) the 2011 decline was actually deep enough to usher in a new bear market, but we know that’s nonsense because the S&P, Dow Jones, Nasdaq and other broad indexes completely recovered their losses.
A Less Confusing Alternative
How about this for an explanation? A new bear market started in 2007 and has been in force ever since. All the rallies we’ve seen since then have been counter trend or bear market rallies.
Obviously, this 3-year rally is not your average garden-variety rally either. In hindsight, the character of seemingly ever rising prices makes sense. After all, the world’s central banks have spent trillions of dollars propping up stocks.
In the middle of May I wrote about the timing component of the topping process and noted the time it took to carve out the 2007 top (about 9 months) and the 2011 top (about 6 months). Based purely on timing, stocks shouldn’t have been ready to fall hard without looking back in May.
Today the picture looks a bit different. Stocks popped, topped, and dropped but 5 months later the S&P 500 (SPY) is still hanging around in the mid 1,300s. Based on timing, selling pressure could accelerate from now on.
The chart below frames the 2009 and 2011 topping processes and highlights the 17%, 21% (and 11%) “bull market” declines. But there’s much more to this chart.
The October 2007 – March 2009 decline erased 909 S&P points within 18 months (50.5 point per month). The ensuing rally is now 40 months old but has recovered only 755 points (19 points per month).
Declines have been swift and sudden, while rallies have been drawn out and gooey with much sideways churning in between.
Regardless of whether the rally from the March 2009 lows is considered a new bull market or a bear market rally, it is already over or close to being over.
Odds are when the bear comes back it will be fast and furious once again.