Opinion: What bear market? Stocks will likely be higher in six months
By Mark HulbertPublished: Feb 12, 2016 5:08 a.m. ET
Substantial gains usually follow painful declines
CHAPEL HILL, N.C. (MarketWatch) — The U.S. stock market over the next six months is more likely to be notably higher than it is to drop further.
I admit that this doesn't seem realistic, given how terribly the market has been performing — including yet another triple-digit loss for the Dow Jones Industrial Average DJIA, +2.00% on Thursday. But a likely rally is what emerged when I studied all occasions over the last 120 years in which the stock market tumbled as precipitously as it has since late December.
At a minimum, therefore, you should be just as prepared for higher stock prices as for lower ones.
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To reach this conclusion, I focused on drops in the Dow that were as steep as the one the stock market has suffered since Dec. 29: Over the 29 trading sessions since then, the Dow has fallen more than 11%. I analyzed all data back to the late 1800s, when the Dow was created.
What I found is summarized in the chart at the top of this column. Notice that the stock market's subsequent returns following losses this big and fast were, on balance, better than the average of all days over the last 120 years.
The market hasn't always rebounded following losses this steep. But it does more often than not.The last time prior to this year in which the market fell at least 11% in 29 trading sessions was in the summer of 2011. Over the subsequent three months the Dow rose more than 8%, and in six months' time was almost 20% higher.
Needless to say, the market hasn't always rebounded following losses this steep. But it does more often than not.
And that's precisely what contrarian analysis would suggest. Drops of greater than 11% in just 29 trading sessions are rare enough and painful enough to lead many, if not most, shorter-term investors to throw in the towel. That in turn sets up the sentiment preconditions for a powerful rally — even if the big drop occurs within a longer-term secular bear market.
This discussion also sheds light on bear market behavior in general: Bear markets are better characterized as a death by a thousand cuts than a fatal stabbing. Each of those thousand cuts is insufficient to lead to the thorough-going pessimism and despair that are the sentiment hallmark of a major bottom. The stock market's plunge since late December is anything but.
From this point perspective, therefore, the market's recent decline doesn't seem like the beginning of a major bear market. That isn't to say that the last six weeks haven't been painful. It instead is to acknowledge that pain, for that is precisely the point.
Posted by: Ray Quick <mercuray1@gmail.com>
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