1.
Conversely a bear market is a market where sellers outnumber the buyers
2.
In a rising market, this five wave/three-wave pattern forms one complete bull market/bear market cycle of eight waves
3.
9 show examples of failures in bull and bear markets
4.
In a bear market, any amount of risk incurred seems to yield negative results, and so the line
5.
will rise in a bull market and nine out of ten will fall during a bear market
6.
bear market, and strong and stable in the long run
7.
in a bear market
8.
went steadily and predictably up, and in a bear market they went
9.
when some 75% of all shares wil rise, or in a bear market when
10.
down does nothing to lessen the anguish while a bear market
11.
But, using the rules in this book, they wil miss most of the next bear market and get the best from
12.
buy) at the end of a bear market
13.
beginning of the bear market
14.
This is possible because of the brevity of bear market trendlines
15.
He’d nonetheless ridden out the bear market that followed by taking big positions in Dow Chemical, in Raytheon, in Honeywell, both for clients and for himself
16.
This built the bear market crowd that dominated the U
17.
We have already seen examples of investment themes: those that unified the bubble crowds of 1994-2000 and the bear market crowd of 2001-2002
18.
The most common bear market—and the one I think contrarian traders should become skilled in exploiting—is the short bear market that lasts about eight or nine months and drops prices about 20 to 25 percent
19.
Here let me cite some typical instances of short bear markets
20.
Notice that these were three consecutive short bear markets, and each was of very subnormal duration compared with the eight- to nine-month average for the species
21.
A similar situation developed during the bubble bull market of 1921-1929, which was interrupted by subnormal bear markets in 1923 and 1926
22.
Short bear markets were prevalent during the 1942-1966 stock market advance
23.
There was a short bear market in 1946, which dropped the Dow 25 percent in five months
24.
The short bear market of 1960 dropped the Dow 18 percent in nine months, while the short bear market of 1962 dropped that average 29 percent in six months
25.
Finally, the 1966 short bear market carried the Dow down 27 percent in eight months
26.
What do these statistics tell us? Every time the stock market averages drop 20 to 25 percent from a high and three to five years have elapsed since the preceding bear market low point, we must suspect that the market has entered a zone of undervaluation
27.
Another illustration of how TV shows can give useful information to the contrarian trader occurred in July 2002, just as the S&P 500 index was approaching its bear market low at 768 (its low that month was 771)
28.
At the time I found this strong corroborating evidence that the bear market crowd of 2002 was about to disintegrate and that the stock market’s low was at hand
29.
The preceding bear market low had occurred in October 1998 with the S&P at 923
30.
First, the inveterate stock market bear, Alan Abelson, noted in his column that the latest Investors Intelligence survey of market letters showed more bearish sentiment than at any time since the bear market low of October 2002
31.
In Chapter 5 I discussed some of the investment themes that were associated with the stock market bubble of 1994-2000 and with the subsequent bear market of 2001-2002
32.
The bubble crowds’ life cycles each extended over several years, while the bear market crowd’s life span was about 24 months
33.
One should note, however, that a 17-month-long bear market in stock prices had ended just four weeks earlier with the Dow closing at a low of 631 on May 26
34.
Remember that there can be no bear market unless there is first a bull market, and no bull market unless there is first a bear market
35.
The novice’s second mistake is to seize upon a prominent bullish story that appears very early in a bull market or a very prominent bearish story that appears early in a bear market and conclude that the new trend is about to reverse
36.
So the contrarian trader would not have taken this headline as evidence of a mature bear market crowd at work in the stock market
37.
In 2002, during the depths of the bear market that followed the bubble collapse, most of the bullish analysts who helped inflate the bubble and many of the corporate leaders of collapsed enterprises were pilloried in the media
38.
Real-time practice can be reinforced by reading accounts of past bubbles and bear market low points
39.
This was the case at the bottom of the bear market in 2002
40.
) I want to emphasize that one need not sell near the exact top of a bull market or buy near the exact bottom of a bear market to beat the buy-and-hold strategy
41.
During a bull market, any above-normal allocation to the stock market should be cut back to normal levels once the averages have risen about 65 percent from the low of the preceding bear market
42.
First, the S&P has advanced at least 65 percent from its preceding bear market low
43.
How does CTS #3 tell the contrarian trader to act during a bear market? If the bear market results from the disintegration of a bullish stock market crowd that was visible toward the end of the preceding bull market, the contrarian trader would have cut back his stock market allocation to below normal once the 200-day moving average of the S&P dropped 1 percent from its high point
44.
In all other circumstances the contrarian trader would sit through a bear market maintaining a normal stock market allocation
45.
Such a long-only strategy will lose money when the averages are in bear markets
46.
Bearish information cascades in the context of bull markets tend to be shorter in time and associated with more modest drops in the averages than are bearish cascades the context of bear markets
47.
To take advantage of this, the aggressive contrarian trader must have some way of distinguishing between bull markets and bear markets in the averages
48.
Here is another, more sensitive mechanical method for identifying bull and bear markets
49.
When the S&P 500 drops 5 percent below its moving average after a bull market of normal extent and duration, the aggressive contrarian can be pretty sure a bear market is under way
50.
If the average moves 5 percent above its 200-day moving average after a bear market of normal extent, one can be confident a bull market is under way
51.
I should point out here that I think that for bear markets in general it is better to be concerned only with the extent of the bear market (the percentage drop from the preceding bull market high), because the time duration of bear markets varies wildly
52.
In a bear market this approach has to be modified a bit
53.
A below-normal allocation can be temporarily increased during the bear market, but only in special circumstances
54.
Of course, like all strategies that objectively try to distinguish between bull and bear markets, this one will always be late
55.
In other words, it will identify a bull market only after the low of the preceding bear market has occurred, and a bear market only after the high of the preceding bull market has occurred
56.
Missing the start of a bear market is generally not too much of a problem, because in most bear markets the worst percentage declines develop toward the end
57.
I handle this dilemma by using my tabulations of the duration and extent of preceding bear markets and by paying careful attention to the relative intensity of bearish information cascades during bear markets
58.
If the most intense bearish cascade (as measured by the number, frequency, and semiotic content of media stories) occurs after a bear market has dropped the averages a typical amount, I am willing to bet that the bear market is complete and that the next up leg will be the first of a new bull market
59.
Once I have an above-normal stock market allocation because think that the first leg of a new bull market is under way, I then wait for the S&P to rally for at least six months and 25 percent from its bear market low
60.
Historical tabulations of previous market swings play an important role, too, especially near the end of bear markets
61.
The Contrarian Rebalancing strategy is very cautious in moving to an above-average stock market allocation once a bear market has begun
62.
During the 1929-1932 bear market the Dow Jones Industrial Average fell from 381 to 40, a 90 percent drop over 34 months
63.
On Friday, October 16, the S&P closed at 282, a level 5 percent below its 200-day moving average and a signal to the aggressive contrarian trader that a bear market had started
64.
I estimated that this was the minimum duration of a bear market associated with the disintegration of a bullish stock market crowd
65.
It was then that I decided that the October low probably ended the bear market
66.
The 1990 bear market was brief, carried the S&P down by 20 percent, and ended at the 295 level on October 11
67.
During the first leg of a bull market the aggressive contrarian wants to maintain an above-average stock market allocation for at least six months, awaiting an advance from the bear market low point of at least 25 percent
68.
Collapse of the Bubble: The 2000-2002 Bear Market
69.
Doing this does not require getting out of stocks close to the tops of bull markets and getting back in near the lows of bear markets
70.
The most important feature of the 2000-2002 bear market from the contrarian trader’s standpoint was that it developed from the collapse of a stock market bubble
71.
Stock market bubbles do not develop very often, but when they do the ensuing bear market is likely to be long and severe
72.
This bear market was no exception
73.
Depending on which average is used as a measuring stick, the bear market lasted between 31 and 33 months
74.
The contrarian trader knows that the postbubble bear market is likely to be long and severe
75.
First, he knows that a severe bear market will probably last anywhere from 18 months to three years
76.
He wants to take advantage of these historical tabulations and the information in his media diary to assume an above-normal stock market allocation as soon as is prudent—that is, as soon as he sees evidence that the bear market has ended
77.
Let’s see how these goals could have been achieved during the 2000-2002 bear market
78.
In Chapter 11 I explained that a conservative contrarian trader should increase his stock market allocation to above-normal levels once he has evidence that a bear market is complete
79.
Second, the S&P 500 should have dropped as much as is typical for the type of bear market that is under way
80.
So if it is a bear market attending the collapse of a bullish stock market crowd (associated with some sort of bubble), then he would expect a drop in the S&P of 30 percent or more
81.
Otherwise, a normal bear market would drop the index only 20 to 30 percent
82.
history was associated with the 2000 high point in the market averages, the conservative contrarian trader would expect the subsequent bear market to drop the S&P at least 30 percent
83.
There was a prolonged bearish information cascade, which had built a powerful bear market crowd
84.
96, a 1 percent move up from its bear market low point of 879
85.
And he did not restore his allocation to normal and then to above-normal levels anywhere near the low bear market close of 777
86.
The 2000-2002 bear market years were punctuated by three very substantial rallies that carried the S&P up at least 20 percent
87.
So in the rest of this chapter I point out some of the opportunities that were open to an aggressive contrarian trader who was content to manage only long positions during the 2000-2002 bear market
88.
I thought that a mini-bear market had ended in October 1998 at the intraday 923 low in the S&P 500
89.
At that point the aggressive contrarian can assume an above-normal stock market allocation even though he knows full well that a bear market might begin at any time
90.
The reason for this is that it is impossible to guess just how far a stock market bubble might inflate, and it is usually best for even the aggressive contrarian trader not to implement a bear market strategy until he sees the S&P drop 5 percent below its 200-day moving average, an event that did not occur until October of that year
91.
But there was no reason for him to believe that the bear market associated with the disintegration of the bullish bubble crowd had yet begun
92.
So at the very least the aggressive contrarian trader would await a drop of 5 percent in the S&P below its 200-day moving average before switching over to a bear market trading strategy
93.
At that point I expected that the bubble crowd would begin to disintegrate and a bear market would take hold
94.
At that juncture I assumed a bear market posture for my contrarian trading
95.
As was discussed in Chapter 11, one way for an aggressive contrarian to identify a new bear market is to watch for a move in the S&P that carries it 5 percent below its 200-day moving average after a normal bear market
96.
Beginning on October 11, 2000, with the S&P at 1,365, the aggressive contrarian would have had ample reason to think a bear market was under way
97.
Since there was plenty of evidence that a stock market bubble had formed during the 1994-2000 stock market advance, the reasonable expectation was that this bear market would drop the averages at least 30 percent from their March high points
98.
A substantial bear market appeared to be under way, especially in the NASDAQ Composite index
99.
The Newsweek cover asked: “How Scared Should You Be?” It is very unusual, even in a bear market, to see three such magazine covers in the same week
100.
After all, as far as he could tell the bear market was still in progress because the S&P had not dropped at least 30 percent from its bull market top