Bear Market Hunting

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The Time Tested Clues That Detect a Major Stock Market Bearish Is Near

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Every past generation has gone through grim multi-year stock markets where the financial devastation was well remembered with fear and anger.

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Since many of these dire market corrections were driven by out-of-control inflation, it seems like the time to discuss what to look for and do before losses occur.

critical statistics

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These five stock exchanges (1906-07, 1929-32, 1939-41, 1973-74, 2000-02) averaged over a two-year period where losses were more than -40%. Their average annual decline was -15%, and it took an average of about 10 years for the market to return to its previous highs. With a cumulative decline of -63%, the four-year decline of the Great Depression was the worst ever.

Detecting early warning of significant market downturns

Sorry, there is no magic indicator to consistently top a bull market!

However, there are tools that investors can use to assess the health of the stock market, just as doctors use various tests on their patients during physical examinations. Experienced investors know how to properly use a range of indicators to achieve consensus as to the overall strength of the market and take defensive action in a downtrend to protect profits.

Although there are many tools used in stock market analysis, the 40-week moving average of the major stock market indices combined with the NYSE Advanced Decline Line (AD line) worked well during these five mega bear markets times (Chart see):

Moving averages are used to determine the direction of the market, and the 40-week time frame proves to be very effective for longer term trends. If an index price is above the moving average, the index is in an uptrend. If the index is below the moving average, the index is in a downtrend.

A forward decline line measures the number of individual stocks where prices are moving up versus down (unweighted). The 40-week moving average is also effective with this figure to determine internal market strength.

impressive results

As can be seen in the chart, the internal strength of the market wears out for several months before the index itself makes a new high. For example, the NYSE AD line began to decline several months before the S&P 500 index broke below the 40-week moving average, thus beginning a new bear market.

Watch January for Clues

There is an old saying, “As January goes, so does the year”. Since 1970, there have been 20 times when both the DJIA and the S&P 500 index had negative results in January. As expected, the average gap-year improvement during those years was -18% and the year generally ended in a loss.

We are overdue for a market correction. It could be building the perfect financial storm if all three of these time-tested indicators turn negative on record valuations of US stocks.

Keep in mind that no stocks are left out of a multi-year bear market carnage. It’s best to forget about diversification as a security and re-allocate your portfolio to significant cash holdings or use hedging tools to protect the value of your portfolio and profit from hard-earned gains in past bull markets. Is.

Remember the old adage, “buy low, sell high”!


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