A New Cyclical Bear Market

By: Stephen Blumenthal

The speed at which stocks have dropped 10% (defined as a correction) two times in a short period of time has happened just three times in the last 100 years. 1927, 2000 and 2008. This from Art Cashin:

“Jason Goepfert, the outstanding pilot of SentimenTrader dug into his incredibly extensive files to uncover a rather rare condition. He noted that the indices have had two 10% corrections in a rather short span. That has only happened three times in the last 100 years. Unfortunately, those occurrences were in 1929, 2000 and 2008. As you may recall, those were not particularly good years for the bulls.”

A bear market is defined as a decline of 20% or more. They happen. Part of the game. Most investors can overcome a 20% decline (needing a subsequent 25% return to get back to even). Overcoming larger declines, like 2008 and 2000, require larger recovery gains and that can take years. Overcoming a -50% decline requires a subsequent gain of 100%. Overcoming a -75% loss requires a 300% return. See the Merciless Math of Loss. Lets hope we don’t see a 1929, 2000 or 2008 like meltdown.

Today, I share with you a chart that has done an excellent job at predicting bear markets. Simply, when the majority of stocks in the S&P 500 Index decline by more than 20% (meaning most stocks are in a defined bear market), the larger index decline follows.

Through Wednesday, 49.8% of the 500 constituents were down more than 20% while the S&P 500 Index was down just 11%. After Friday’s market beating, I believe we have entered a new cyclical bear market.
My two cents remains the same: Hedge that equity exposure and overweight liquid alternatives. We want to be in a position to pick up bargains when the valuations become attractive. Not yet there. Further, I share a few ideas below and set some price targets for the S&P 500.

The current opinions and forecasts expressed herein are solely those of Steve Blumenthal and are subject to change. They do not represent the opinions of CMG. CMGs trading strategies are quantitative and may hold a position that at any given time does not reflect Steve’s forecasts. Steve’s opinions and forecasts may not actually come to pass. Information on this site should not be used as a recommendation to buy or sell any investment product or strategy.

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