The bear market for stock never ends. In fact, it may be far from over. The reason for this – even with the S&P 500 SPX,
16% from its all-time high to low, and both Nasdaq composite comp,
And Russell 2000 Index RUT,
In the beer-market region – many investors are more focused on when and where to invest in stocks than on the possibility of a steep fall.
The fishing below is more reminiscent of the “shield of hope” that markets typically go down than the “wall of concern” bull markets prefer to climb. This does not mean that the US stock market could not mount an impressive rally from current levels. If it did, it could be a bear-market rally rather than the start of a new bull-market leg that would take the major market averages to new all-time highs.
A review of the bear markets of the past suggests that when the current beer market has reached the bottom, very few investors will even consider that possibility. Disappointed like throwing a towel, we either don’t pay attention, or consider any sign of market strength as a bear market trap.
This is not the current mood on Wall Street. Beer-market psychology follows a breakthrough that psychologists call the five stages of grief – denial, anger, bargaining, depression and acceptance. Here’s how they appear in the stock market:
- Denial – At this early stage, the prevailing view is that stock-market weakness is nothing more than a buying opportunity. Far from being angry (see next stage), investors are quite stable, as the market pullback gives the bulls the opportunity to buy stocks much cheaper than if the market continues.
- Anger – As market pullbacks become more intense, it becomes increasingly difficult to sustain denial. The mood of the investors eventually turned to anger as they protested against the injustice of the pullback. A feature of this stage is where investors see the pullback as a personal insult – as if the market wonders if you or I are losing money.
- Bargaining – At this stage, investors redirect their energy to find out if they can maintain their lifestyle despite hitting their portfolio; Retirees recover their financial plans. Investors promise to give up that fancy new car or European vacation – the fat of their budget – until they have to cut bones.
- Depression – As the market continues to slide, the realization set that cutting fat is not going to be enough. Lifestyle changes will be needed. Near-retirees work longer than the original plan; Retirees return to work.
- Acceptability – In this final stage, investors throw towels. They surrender to the bear market and stop imagining when it will end. They treat any sign of market power as a sucking assembly, tempting Bhola to lose more money on the next leg.
Where we are now in this cycle
My guess is we are no more than the second through this five-stage cycle. There are distinct exceptions, of course, since not all investors move at the same pace. But the predominance of the attitude I encounter is that pullback is a buying opportunity (stage one) or market weakness is deeply unfair (stage two).
The progress of investors at this stage must be real. As I mentioned last week, it doesn’t make sense to say that you dropped the towel, just to jump on the bullish bandwagon quickly at the first sign of market strength. Such reactions are slightly more than stage-one behavior in disguise.
Which brings me to the recent claim that we are seeing signs of surrender on Wall Street. If the surrender is real, it will prove that we are in five steps. But I’m skeptical: in true surrender, there is no interest in identifying surrender. The main characteristics of true surrender are apathy and indifference.
Not all falls go through all five steps, of course, just as not all corrections turn out to be a major good market. So this discussion does not mean that the market is yet to fall much further. But if bulls want to claim the power of reverse analysis to support their beliefs in a gathering, then a real surrender is needed. Otherwise, the bull argument is just proof that the market fell in the early innings.
Mark Halbert is a regular contributor to MarketWatch. His Halbert rating tracks investment newsletters that pay a flat fee for auditing. He can be reached [email protected]
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