Anatomy Of A Bear Market: What The New Bear Market Could Look Like

We believe the stock market has started a massive Bear Market that could last many years. The top arrived for the Industrials in May 2015. Since then, a new Primary Dow Theory Bear Market Signal was generated. Since June 22^nd, 2015, the stock market, as measured by the Wilshire 5000, has lost $2.2 trillion. That means over 40 percent of all the QE 1, 2 and 3 money printing programs injected into Wall Street has been wiped out in just a few months. That QE was a raving success, wasn’t it? To unload the over $4 trillion of Bonds the Fed is now stuck holding in its balance sheet because of these QE programs, the Fed would have to suck that amount of money from the economy, which would cause an economic depression. The Fed is in trouble. Interest rates are already at zero. Are they going to tighten the money supply after a $2.2 trillion decline in the stock market? If they do, they will be repeating the same inane policy they did at the start of the Great Depression of the 1930s. This market is about to spiral into a black hole and the Fed has been forced out of the game. So, the question is, how will this Bear market look? Will it be a waterfall once and done 

Above we show the anatomy of a Bear market with a chart of the stock market crash from January 2000 through March 2003. There are a few things I want to point out. First, there is a repeated pattern of price behavior that looks like this:  A min-crash or full-blown crash plunge occurs, usually lasting 2 to 6 weeks that sets a new lower low for stocks. Then a violent bounce occurs that lasts a week or two that fails to retrace the entire decline, establishing a lower high. After the initial violent rally, there often is a period of dénouement where stocks sit in a sideways pattern or slowly rise for anywhere from a few weeks to a few months. Once it is established that a new higher high is not going to happen, stocks plunge again, and so forth. When the next plunge fails to establish a new lower low, that is an early warning the Bear market is ending. That happened in March 2003.                   

Here is a journal of the declines and rallies during the 2001 to 2003 bear market, shown above, using approximate numbers and dates:

* The Industrials plunged 1,750 points from 1/14/2000 to mid March, 8 weeks.

* They rallied violently 1,500 points from mid March to mid April 2000, 4 weeks.

* They went sideways from mid April to end of August 2000, 4.5 months.

* They plunged 1,700 points from early Sept to mid October 2000, 6 weeks.

* They rallied violently 1,350 points from mid October to early November 2000, 2 weeks.

* They went sideways from early November 2000 to early February 2001, 8 weeks.

* They plunged 2000 points from early Feb 2001 to mid March 2001, 6 weeks.

* They rallied violently 2,000 points from mid March to mid May 2001, 9 weeks.

* Not much sideways after that vertical rally.

* Stocks plunged 1,100 points from mid May 2001 to mid July 2001, 7 weeks.

* They rose 600 points in a mostly sideways pattern from mid July 2001 until 9/11, 8 weeks.

* Stocks crashed 2,500 points from 9/11/01 to the end of September 2001, 3 weeks.

* They rose violently 2,750 points with an extended sideways pattern in the middle of the rise from October 2001 to mid March 2002, 5.5 months.

* Stocks then plunged 1,000 points from mid March 2002 to end of April 2002, 6 weeks.

* They bounced 500 points into mid May 2002, 2 weeks.

* Then they crashed 2,750 points from mid May to end of July 2002, 10 weeks.

* Then they rallied violently 1,500 points through the end of August 2002 in a zigzag, not much sideways, 4 weeks.

* Then they plunged 1,750 points from early September through October 10th, 2002, 5 weeks.

* Then they rallied 1,750 points through end of November 2002, 7 weeks.

* Then they plunged 1,600 points from beginning of December 2002 through mid March 2003 where a bottom was found as the Iraq War began.       

Conclusion

Most of the plunges were followed by rallies that were significant, as this Bear market stair stepped lower. Sideways patterns and rallies shook out the shorts. Plunges devastated long-term investors and Bulls. It was a continuous pattern of lower highs and lower lows. Just when an investor thought it was safe to go back into the water, he was met with a set of sharp incisors.

Here is a journal of the declines and rallies during the 2007 to 2009 bear market, shown above, using approximate numbers and dates:

* The Industrials plunged 1,500 points from October 2007 to mid November 2007, 5 weeks.

* They rallied 800 points from mid November to early December 2007, 3 weeks.

* They went sideways from mid to late December 2007, 2 weeks.

* They plunged 2,000 points from late December to mid January 2008, 3 weeks.

* They rallied violently 1,500 points from mid January to end of April 2008, 14 weeks, including several sideways moves.           

* They plunged 2200 points from early May 2008 to mid July 2008, 10 weeks.

* They rallied 900 points from mid July to early August 2008, 3 weeks.

* The Industrials plunged 3,500 points from early August to mid October 2008, 8 weeks.

* They rallied violently 1,500 points from mid October to early November 2008, 2 weeks.

* They plunged 2,000 points from early November to early December 2008, 4 weeks.

* They rallied violently 1,500 points from early December to end of December 2008, 4 weeks, including several sideways moves.      

* They plunged 2500 points from early January 2009 to mid March 2009, 8 weeks.

The Bear Market Ends.  

It is this type of price action we should expect over the coming years, plunges followed by initial violent rallies, followed by sideways periods, a bit more upside, then another plunge.            

The Wilshire 5000, which represents almost the entire stock market, has lost $2.22 trillion since the June 22nd, 2015 top at $22.537 trillion, even after this past week’s bounce. The above chart for the Wilshire 5000 shows a Jaws of Death pattern from 1990 that has completed. Investors must be on high alert that Grand Supercycle degree wave {IV} down has started.

Think about this: In just a few weeks, one-third of the total of all QE programs from the Fed has been wiped out! All that monetary printing out of thin air, $5.0 trillion, that the Fed gave to Wall Street in exchange for interest bearing securities held by Wall Street, some of those securities not so good, in QE 1, 2 and 3 has now disappeared from a stock market collapse. Instead of placing that $5.0 trillion in the real economy through a tax rebate to Main Street, the Fed chose to give it to Wall Street to drive up the stock market artificially. The chickens have come home to roost, and the above chart says this fallacious Fed policy has failed. All it accomplished was a temporary levitation of the stock market and a huge rise in the cost of living on Main Street.     

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Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com.  The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only.  Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice.  Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision.  Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment.  Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2015, Main Line Investors, Inc. All Rights Reserved.