Bear Market? Or Just A Big Correction? 05-22-20 – RIA

https://realinvestmentadvice.com/bear-market-or-just-a-big-correction-05-22-20/

Was the March sell off a bear market? Or was it just a big correction? We look at the technical and fundamental evidence to try and determine our risk.

As noted last week, the markets remain stuck between the 50- and 200-dma. That remained the case this week once again, keeping any expansion of equity positioning on hold.

The shaded blue area shows the containment of the market between the two moving averages. With the market very overbought short-term (orange indicator in the background), there is downside pressure on prices short-term.

This past week, the current risk/reward ranges remain unfavorable. I have updated the levels from last week:

  • -7.6% to the 50-dma vs. +5% to the March peak.
  • -11.5% to -17.1% to the late March peak or early April low vs. +13.6% to all-time highs.
  • -24.7% to March 23rd lows vs. 13.6% to all-time highs.

For now, we remain “stuck in the middle.”

However, if the markets can break above the 200-dma, and maintain that level, it would suggest the bull market is back in play. Such would change the focus from a retest of previous support to a push back to all-time highs.

While such would be hard to believe, given the economic devastation currently at hand, technically, it would suggest the decline in March was only a “correction” and not the beginning of a “bear market.”

Was This A Correction Or A Bear Market?

Price is nothing more than a reflection of the “psychology” of market participants. A potential mistake in evaluating “bull” or “bear” markets is using a “20% advance or decline” to distinguish between them.

Such brings up an interesting question. After a decade-long bull market, which stretched prices to extremes above long-term trends, is the 20% measure still valid?

To answer that question, let’s clarify the premise.

  • A bull market is when the price of the market is trending higher over a long-term period.
  • A bear market is when the previous advance breaks, and prices begin to trend lower.

The chart below provides a visual of the distinction. When you look at price “trends,” the difference becomes both apparent and useful.

This distinction is important.

  • “Corrections” generally occur over very short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs.
  • “Bear Markets” tend to be long-term affairs where prices grind sideways or lower over several months as valuations are reverted.

Using monthly closing data, the “correction” in March was unusually swift but did not break the long-term bullish trend. Such suggests the bull market that began in 2009 is still intact as long as the monthly trend line holds.

However, I have noted the market may be in the process of a topping pattern. The 2018 and 2020 peaks are currently forming the “left shoulder” and “head” of the topping process. Such would also suggest the “neckline” is the running bull trend from the 2009 lows. A market peak without setting a new high that violates the bull trend line would define a “bear market.”

Valuations

Valuations also suggest the decline in March was just a correction and not a bear market.

The chart below shows the history of secular bull market periods going back to 1871 using data from Dr. Robert Shiller. The defining difference between bull and bear markets is valuations. Bull markets are defined by expanding valuations, while bear markets contract valuations. Market “corrections” tend to have minimal impacts on valuations….[   ]

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Author: neptune


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