The bear market for stocks is not over yet. In fact, there may be ways to go. That’s because – even with the S&P 500 SPX,
16% below their all-time high, both of which are from the Nasdaq Composite,
and the Russell 2000 RUT index,
In bear market territory – many investors focus more on when and where to invest in stocks than worrying about the possibility of further sharp declines.
Bottom fishing is more reminiscent of the “slope of hope” down which bear markets usually slope more than the “wall of anxiety” that bull markets are willing to climb. This does not mean that the US stock market cannot make an impressive rally from the current levels. If that happens, it’s more likely to be a bear market rush than the start of a new bull market leg that takes the major market averages to new all-time highs.
A review of previous bear markets indicates that when the current bear market bottoms, few investors will consider this possibility. Either we won’t even pay attention, having become so depressed that we have thrown in the towel, or we will regard any sign of market strength as a bear market trap.
This is not the current mood of Wall Street. Bear market psychology follows a similar progression of what psychologists call the five stages of grief – denial, anger, bargaining, depression, and acceptance. Here’s how it looks in the stock market:
- denial At this initial stage, the prevailing view is that stock market weakness is nothing more than a buying opportunity. Far from outraged (see next stage), investors remain quite optimistic, since a market pullback provides an opportunity to buy shares at a cheaper price than would have been the case had the bull market continued.
- anger It becomes increasingly difficult to sustain denial as the market pullback becomes very severe. The mood of investors eventually turns to anger, as they attack the unfairness of the retreat. The hallmark of this stage is where investors see the pullback as a personal insult – as if the market cares whether you or you lost money.
- compromise – At this point, investors are redirecting their energies to see if they can maintain their lifestyles even though their portfolio is damaged; Retirees are reorganizing their financial plans. Investors promise to ditch that fancy new car or European vacation — fat from their budgets — as long as they don’t have to cut the bones.
- depression – As the market continues to slide, the realization is that reducing fat will not be enough. Major lifestyle changes will be required. Pensioners about to retire are working longer than originally planned; Retirees go back to work.
- Acceptance At this final stage, investors are throwing in the towel. They give in to the bear market and stop even imagining when it might end. They treat any sign of market strength as a rush of bad guys, tempting gullibles to lose more money in the next leg of the drop.
Where are we now in this session
My impression is that we no longer go through this five-stage cycle any more than the second cycle. There are individual exceptions, of course, as not all investors advance at the same pace. But the predominance of the situations I face is that either the pullback is a buying opportunity (Phase 1) or market weakness is deeply unfair (Phase 2).
Investors’ progress through these stages should be real. As I indicated last week, it doesn’t make sense to say you threw in the towel, only to quickly jump on the bullish bandwagon at the first sign of market strength. This reaction is little more than a disguised first stage behaviour.
Which brings me to the recent claims that we are seeing signs of capitulation on Wall Street. If the surrender is real, it will be proof that we are in stage five. But I am skeptical: in true surrender, there is no desire to disclose surrender. The main features of true surrender are apathy and indifference.
Not all declines go through all five stages, of course, just as not all corrections turn into major bear markets. So this discussion does not mean that the market still has further downside. But if the bulls are to claim the power of paradoxical analysis to support their belief in progress, there must be a real capitulation. Otherwise, the bulls’ arguments are simply evidence that the market’s decline was in its early beginnings.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert rating tracks investment newsletters that pay a flat fee to review. It can be accessed at firstname.lastname@example.org
more: Morgan Stanley says the potential for a “hard landing” is jumping as equity and bond investors worry about economic growth
Plus: 15 stocks are down at least 33% but by these metrics they still stand out in their sectors