Geometry of the Stock Market Isn’t So Good

The slippery slope of the Bear market just hit a 90-degree angle. After coasting at a 45-degree angle, that at times looked like it would plateau, stocks are now moving decidedly down hill and picking up speed. Each bump in the road this year has shaken out
passengers, but now those thrown from the market will face even greater fiscal injury (not to mention mental, as they will be taking lumps that at times will amount to 90% losses). Yet, it will be difficult to hang on. That said, it might be impossible to jump on. The real scary part is that we don’t have a road map for this kind of ride. The last time there was a two-year bear market was from January 1973 to December 1974. The last time there was a three-year bear market was from September 1939 to April 1942. It is fair to say that 95% of us know nothing of the two-year bear market, so this is un-chartered territory. Adventure
is fun when we get it via books and movies, but stock market investors don’t have the fortitude and luck of an Indiana Jones, they close their eyes when the danger comes too close. However, now is the most important time ever to keep one’s eyes open. It is also time to start looking deep in the history books for answers. This isn’t the first time the stock market has plunged, and it isn’t the first bubble that has had to totally deflate.

According to published reports from Ned Davis research, the average bear market lasts 418-days, and lops off 31% in stock market value. This data is focused exclusively on the Dow Jones industrial average. (I’m not sure how the NASDAQ figures into historical
data. One thing is for sure, that index which worked so hard to shed its moniker as the "over the counter" market, has been so fractured that it may never recapture former glory. In fact, it seems like each session sees a former NASDAQ-listed company ringing the bell at the NYSE. It will be very tough to not only rebound, but to be the hottest index with many of their brightest stars no longer listed.) Officially, the Dow’s bear market began
in January of 2000; so it is a long way passed the typical time frame. That said, the index has been resilient, and at times was only a bear market in name. Despite the length of the current
bear market, it hasn’t satisfied the historic norm in terms of value yielded. As it stands now, the Dow is off 22% from the all-time high. In many ways, the index has been a victim of its own success. It is hard to sell off when there is a migration from tech stocks into comfort stocks. As an avid tape watcher, I could see over and over again that the index wanted to pull back
and investors wanted to take some profits off the table. PG, MMM and JNJ were - and are - trading at the high-end of their respective valuation ranges. Yet, before the re-rotation could build a head of steam, there would be another bomb dropped in
tech/biotech land.

Now, it doesn’t seem to matter for those that have successfully dodged the massacre by focusing on company’s they know and understand. They are cashing in and putting the money on the sidelines. Save for the residue from the Great Crash in 1929, that saw the DJIA take 20-years to recover, the longest bear market has lasted 2.5 years. That is good news, (I guess). The stock market reclaimed 73% of its value within 9 months of the Great Crash (okay, it wasn’t so great, but this is the "me" generation and it thinks we do everything better than those that came before us) of 1987. With this in mind, maybe the market will
move to a 180-degree angle and satisfy two elements of history. Matching the timeframe of the longest bear market, and at the same time yielding the average amount of ground that has been typical. Maybe a quickening climax to what has been cruel treatment could
be the answer. But, hold on to your hat, it means the Dow has to fall to 8177 before a floor can be put in. The last three trading sessions of the week saw the Dow off an average of 150-points, on Wednesday, Thursday and Friday. At that rate, we could see the
index bottom in 7-trading days. That would mean the world’s largest equity market, and the pride (we still love it deep down inside) of the nation could be ready to rebound after the fourth
of July.

About the Author

Since 1991, Charles Paynes’ Wall Street Strategies has successfully
provided timely and effective equity advice to institutional
money managers, retail brokers and individual investors of all
types, and has thousands of subscribers from hundreds of brokerage
firms. http://www.wstreet.com Wall Street Strategies provides research
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