How Will We Know When the Bear Market is Over?
There are all sorts of statistics and indicators a person can look at in order to
try to determine the future direction of stock prices. The long-term oscillators
have been useful in determining when the worst-case scenario has been factored
into current prices, but they are not accurate 100% of the time. Sometimes there
can be double bottoms as well.
A 5-year chart of the oscillator for the S&P 500 is shown below. The green
arrows indicated accurate market bottoms in January 2018 and April 2020.
However, another green arrow shows when the oscillator turned up in March of
this year for what turned out to be a bear market rally. It turned up again from a
lower level in late May. Time will tell if that reversal will be more accurate. (Data
from Eikon).
A pattern of higher highs and higher lows is simple evidence that there is more
buying than selling. A pattern like this can be useful but stock prices can reverse
again if there is just a short-term rally in a longer-term bear market. See a oneyear
chart of the S&P 500 from WSJ below.
The three-month chart shows how the S&P 500 has been making higher highs
and higher lows since the June 16th low more than a month ago. The current high is
also higher than the lows on May 12th and May 19th. The next test will be to see
whether market averages can rise above the highs of 4,162 on the S&P 500 made
in early June of this year. That is 163 points or 4.1% above today’s close of 3,999.
Clues that a bear market is over are nice, but I prefer indicators that have been
accurate 100% of the time on a consistent basis. A Breadth Thrust or 2-1 Advance/
Decline Buy Signal has been foolproof for indicating when US stock prices will be
higher 6, 12 and 18 months into the future. Please see the track record from
InvesTech below.
The only downside to this indicator is that the signals are rare. The level of
buying required to trigger this indicator is so great that it typically occurs only
after a severe bear market. There have only been 10 original buy signals since
1962. (There have been times where there were two or three buy signals within
months of the first signal, which are not recorded in this table.) There have
recently been three signals in a short period of time (2016, 2019 and 2020).
Perhaps all of the liquidity sloshing around is creating larger, more violent
movements of capital that are in turn producing these signals more often now.
Nevertheless, a new uptrend could end the present bear market without enough
strength to produce a Breadth Thrust Buy Signal.
Fortunately, I have another indicator that has had a 100% accuracy rate of
determining the end of a bear market and the start of a new uptrend. I lost access
to this for a number of years but regained access to it again last month, thanks to
the hard work of RBC Technical Analyst Robert Sluymer.
When there is a political election, all of our own opinions and rational
thoughts are meaningless. The same has often been true of the political experts.
All that really matters is how individuals feel about each of the candidates or the
issue, whether it makes sense or not. The same is true with asset prices and stock
prices. All of what is going on in the world is reflected by how investors are
voting with their money in the marketplace. If the views and emotions of all
investors are reflected in the stocks prices, then it just makes sense that all that is
necessary is to study prices.
The indicator I am referring to is based on something very simple, but it is
complicated to produce the data. This indicator looks at all of the stocks in a
specific market index to determine the percentage of the stocks that are in an
uptrend. When the percentage of stocks in an uptrend falls below 20% and then
rises back above 20%, it signals the end of the market decline and the beginning
of a new uptrend lasting at least 12 months. There have been some signals that
have been premature or false for various market averages. I have solved this
problem by using two market averages instead of just one to give a buy signal. I
have found that when the percentage of stocks in an uptrend falls below 20%
and then rises above 20% for the S&P 500 AND the S&P/TSX Index, it has
been an accurate signal that a new longer-term uptrend has started every
time since the inception of this indicator in 1980. These signals are also useful
for business owners since they indicate when the economy should improve. Prices
might be more reasonable to expand a business or buy out a competitor when
times are tough and there are recession fears like there are now.
The green line at the bottom of the chart is at the 20% level. When the blue
line falls below that line and turns up to rise above 20% again, it is a sign that
enough money is flowing back into stocks to produce an uptrend. I would suggest
you ignore the green and blue arrows in the chart to keep it simple.
This is calculated once a month. As of July 1st, only 6.96% of stocks in the
S&P 500 were in an uptrend. Looking at 2008 and 2009 provides an excellent
example of why I use this indicator for the S&P 500 in conjunction with the
indicator for the Canadian S&P/TSX Index. You can see that this indicator fell
below 20% in late 2007, rose above 20% in 2008 and then dropped again. It rose
above 20% again in March of 2009. This last signal was the more reliable signal.
If you look at the indicator for 2008 and 2009 for the TSX on the next page, you
will notice that it only rose above 20% once in April 2009.
The current record for this indicator for the S&P/TSX Index only goes back to
the start of 2008. Thank goodness I have hard copies in a binder going all the way
back to 1980 from when I had access to this tool before. This is how I can be
specific with the months that the indicators turned up in 2008 and 2009. If you
look at the years 2008 and 2009, you will notice that less than 20% of Canadian
stocks were in an uptrend for the entire period from the start of 2008 until March
2009. Then, on April 2009, more than 20% of stocks were in an uptrend. (Please
be aware that the green line near the bottom of this chart is at the 30% level, but I
still use the 20% level as a turning point for the S&P /TSX Index.) This
confirmed the signal given by the indicator for the S&P 500 on March 2008.
Together, these indicators issued a buy signal on April 1, 2009, according to my
rules. That proved to be accurate and timely once again.
Using these rules, the S&P 500 and TSX Index gave a buy signal in June 2012
and in the spring of 2020. The indicator for the TSX did not fall below 20% from
2013 until 2020. Fortunately, the Breadth Thrust Buy Signals provided several
buy signals during this interval.
Research that I did years ago shows that these indicators gave buy signals in
July 1982, November 1984, September 1988, December 1990, March 1995,
January 1999 and June 2003. If we include the buy signals in April 2009 and June
2012, there was a total of 9 buy signals from 1980 to 2012. The average gain for
the S&P 500 12 months after these signals was 28.97%. The lowest return was
after a 10% correction when the S&P 500 rose 13.3% after the November 1984
buy signal. I do not have the exact date for the buy signal in 2020 but the S&P
500 was up 24.05% from June 1, 2020 to May 31, 2021. Past performance does
not guarantee future results, however, this has proven to be a very useful tool over
a very long period of time because it is driven by human behaviour in the markets,
instead of the opinions of experts, news headlines or by economic data. It is
driven by people voting with their money. This is why it has been so accurate.
As mentioned earlier, as of July 1st, there are now only 6.96% of stocks in the
S&P 500 and 7.53% of stocks in the TSX that are in an uptrend. Stock markets
have eventually risen to record highs time and again after selloffs like this ever
since the Financial Crisis. Stocks are in the mist of a 16 to 18-year growth cycle.
There have been three declines of 20% or more since December 2018 so it has
been an unusually volatile 3 ½ years! Recency bias causes us to think that what
has happened in the recent past will continue. We must be careful to not let this
bias affect how we view the future. If history repeats, it will only be a matter of
time until stocks begin another powerful uptrend. Since both of these indicators
have dropped below 20%, what has happened in the pasts suggests that they will
give a buy signal when enough money starts flowing back into stocks to produce a
long-term uptrend. I will let you know when these indicators give us the signal
implying that the bear market is over and that a new uptrend has started. Now all
that we need is patience! Thank you for your trust and confidence as we navigate
uncharted waters!
I finally got the opportunity to take a tour of the Britannia Mine site near
Squamish B.C. that I have passed by every time I travel to Whistler. It was the
biggest copper mine in North America at one time, but it closed in 1974. This is
still a very large 50-year old truck, but some of the mining trucks are even larger
now.
As we have become more interested in the Internet and technology, we tend to
forget how much materials like copper and lithium are required to produce and
power all of our computers and wireless devices. It takes just as much power and
effort to produce metals now as it did years ago, which can explain why they cost
so much to produce, especially with all of the newer environmental regulations. I
found the tour to be very interesting and would highly recommend it if you are
looking for something to do this summer and will be near Vancouver. Please see
a photo of the inside of the building you can see from the road where they
processed the rocks into a slurry of copper. Have a great weekend my friend!
