Boy, oh boy. Those vicious bears are really sinking their teeth into our poor, old bull market this week. Take it easy, you brutes! I mean, I know he’s aging and ready to be put out to pasture, but do you have to usher him to the grave so speedily?
Such are my thoughts as I, along with every trader, wonder whether or not we’ve just witnessed the death of our beloved friend. Born in the depths of misery, the 2009 cyclical bull market grew to become one of the greatest of the past century. It faced doubt, skepticism, and downright hate along the way but continued reaching for the stars regardless. The phrase climbing a wall of worry couldn’t be more descriptive of the six year old bull market.
Of course, we may be getting a bit ahead of ourselves. Perhaps the current market downturn is just another correction designed to scare the panic-prone among us. Maybe the old bull market is engaging in a bit of trickery; faking death only to score an epic resurrection when no one suspects it. After all, it’s not as if we haven’t seen such subterfuge before. There was the summer swoon of 2010 – punctuated by the infamous flash crash – which delivered a 17% decline. And then there was the harrowing haircut of 2011 which was good for a 21% decline before sellers finally relinquished the scissors. …and don’t forget the 10% drop suffered in 2012. Since then it’s really been smooth sailing until our recent drama.
So how do we know when a cyclical bull market has officially ended a new bear has begun? Well, the widely accepted definition of a bear market on Wall Street is a decline of 20%. Why 20%? Beats me, but hey, you have to draw the line somewhere, and I suppose 20% is as good a threshold as any. As of Tuesday’s close, the S&P 500 was off 11.7%, the tech-heavy Nasdaq composite was down 13.7%, and the small-cap laden Russell 2000 Index was off 16.4%.
And that right there is your answer. According to the all-powerful wizards who selected the magical 20% threshold, no, we are not in a bear market. It’s a correction, and a severe one at that. Honestly, though, most traders don’t care about the dang definitions. From a trading perspective, you should be bearish when the trend – especially the weekly one – reverses. Guess what? The trends of all major indexes are officially pointing lower.
Until sufficient bullish evidence materializes, the path of least resistance is down.
In the event the selling raid turns into a full-fledged cyclical bear market, let’s establish a few downside targets. As is always the case, we’re going to use the past to guide our aiming efforts. If you look at every bear market since 1929, using the Dow Jones Industrial Average you’ll discover the average descent is somewhere around 30% and the average duration is approximately 18 months. Were we to see the S&P 500 Index undergo a similar swoon, it would tumble to $1493 (Target 2). To even enter an official bear market, we would need to see the aforementioned 20% decline which would take us down to $1707 (Target 1).
Another forecasting approach would be to use a Fibonnaci retracement for the entire 2009-2015 bull market. A pullback of 38.2% would carry us to $1580 (Target 3). You’ll recall the $1560 to $1580 zone has been quite significant historically. It halted the two previous bull markets in their tracks and was resistance for 13 years before finally giving way. This old resistance should become support in a big way if the next bear market leads to a retest.
Obviously these are long-term targets, but it at least provides an idea as to how much downside we’re looking at if a bear market really does materialize in the months ahead.
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