The S&P 500 is guilty of officially entering into a bear market this month, according to my rules, after the August lows of approx. 1870 were cracked (market close below that level) AND the 200 day MA was violated in January. Since then, the market had a brief rally and then another drop to yet another low a week ago. Lower lows, lower highs – what more do I need to say? Until we have a peak that exceeds 1940-1950 AND a move over the 200 day MA (10 month on the monthly chart below) that lasts for at least 3 weeks, I am operating in bear market mode on an intermediate termed basis. See my daily chart below with the annotations.
Keep in mind the need to be flexible. These are rules that make up the baseline of my risk/reward model. I’d encourage you to read my book Sideways for greater insight on them. Things can change—we can get the breakout through the last high and the MA, and we can go back into bullish mode on the intermediate termed level—with a new upside target of the old highs into 2135 or so. But that’s not happening right now, so I must consider the market guilty of being in a bear phase until proven innocent.
BTW–The long termed bull will not be verified as back in action until S&P 2135 is taken out to the upside. But that’s a ways down the road, and not the topic of today’s blog.
Bear market rallies can fake you out.
Rallies occur in a bear market—just as pullbacks occur in a bull market. Pay attention to the rules above before getting too bullish—and be mindful of waiting for a few weeks as/if and when a spike through 1940 and the 200 day MA happens. Whipsaws happen. For example… here is the chart of the S&P over the past 20 years, with the last 2 major bear markets circled.
In 2000-2002 bear market, the S&P 500 lost (peak-trough) 49%. Yet, there were plenty of strong up days and multiple up days in that bear market. Here is a chart from Chris Ciovacco demonstrating the head-fakes of that horrid bear market
In the recent financial crises, which pushed the S&P500 down 56% peak to trough, you can see the same pattern of head-fake rallies – chart again courtesy of Chris Ciovacco.
As a soothsayer once warned Julius Caesar – to paraphrase it to fit my needs—“Beware of bad things possible in March”