The recent Bear Move, that began in mid-May, ended in the last week of June and the Bulls are in charge again. Of course, experts on CNBC are still advising investors to be cautious and not rush in, just like they were telling all of us a month ago to not be alarmed by a down day or two. Meanwhile, the S&P 500 declined 7% from its close of 1363.61 on April 29th to the close of 1265.42 on June 15th. At that point effectively the market was up 0 % for 2011, with many stocks down 20-30% from their recent highs.
Usually, it is at that moment of maximum financial pain, when many individual investors stop listening to advice that “things are fine” and finally dump indiscriminately the stocks they have bravely held through the decline. This “capitulation selling” is the reason why we often observe the heaviest volume at the end of a bear market.
The individual investor is famous for buying at the top and selling at the bottom. But it doesn’t have to be this way. Monitoring a few simple technical red flags, would have warned anyone of the serious bear move in May so you could have closed your long positions (and even gone short) by mid-May and reenter the market this week (week ending Friday July 1st) as the market gave clear evidence the uptrend is resuming.
Technical Signs of a Bear Market. The best known rule of thumb for a down trend is a series of lower highs and lower lows. While this rule is as valid as ever, it sometimes takes the market at least a week or two to establish its next high or low for investors to evaluate. The rules listed here will usually give you a much earlier warning.
- For the first time since the uptrend began, huge down days were observed.
- While in an uptrend volume comes in on up moves, and dries up on pullbacks; now the volume is big on down days and during down swings.
- Most big move days are to the downside.
- Big up-days are immediately reversed the next day.
- Down legs last longer and the price moves farther, than during up legs.
- Average down days will be common, often 2-3 in a row.
Some of the above characteristics of a bear market may appear pretty commonplace, and so the investor is in jeopardy of not realising their significance and failing to take immediate action. However a look at the complete lack of the above, during the weeks preceding the recent downtrend will reveal that a major change in market bias is in the works. Let’s see how the above list fared in the recent bear market:
For the first time since the uptrend began, huge down days were observed.
This time we did not get a HUGE down day until June 1 (although we had plenty of big decline days.) June 1 was the biggest single day decline for 2011, and while it came too late to be an early warning, it was certainly a confirmation of a bear trend.
While in an uptrend volume comes in on up moves, and dries up on pullbacks; now the volume is big on down days and during down swings.
Note on the chart how volume dries up during the short pullback during the second week of April; as soon as the uptrend resumes – volume increases. Now compare that to the volume from May 1st onward: As the price declines, volume actually increases ! As the market (SPYs) tries to rally on May 8th and 9th, volume drops ! The difference in volume is evident on the next decline and rally also. In general, the average volume on down days is bigger than the average volume on up days (compare height of red vs. black volume bars.)
Most big move days are to the downside.
I have pointed to all the up big move days and all the down big move days that occurred during the bear move. Big down days outnumber big up days about 2 to 1.
Big up days are immediately reversed the next day.
Note how virtually all the marked “big up days” are reversed the very next day (with maybe just one exception.)
Down legs last longer and the price moves farther, than during up legs.
For simplicity, I define a “leg”: a price move of at least 2 days in the same direction. A down leg can include an up day as long as it it did not close above the previous day’s open, and vice versa.
Average down days will be common, often 2-3 in a row.
Down days in an uptrend are rare and usually occur one at a time. It is normal to see several down days together during a pullback, but most if not all of those will be very small decliners. Seeing 2,3 or even 4 down days of average or big price decline in a row (as we have been since May 1st,) however, can only mean one thing – Bear Market ! If you look at the charts above, you will see that the recent Bear was no exception.
As we have seen, the recent bear market move was typical and easily recognisable from the start, given the right tools. Hopefully, the technical red flags described here will help traders and investors take swift action the next time the bears go on the offensive.