Cyclical Bear Market

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The Volume Oscillator discussed in this section is one of several encouraging developments within our Attitudinal work that has sent that category to its least negative reading (-57, Chart 1) since July 2013.

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Will Rogers said, “It isn’t what we don’t know that gives us trouble, but what we know that ain’t so.”

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Our longer-term bear market forecast and a temporarily positive stock market stance aren’t mutually exclusive.

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We expect a “garden variety” cyclical bear market to break out this year or early next year and present a chart demonstrating the potential path of decline. In the context of the last two decades’ market action, a decline of this variety does not “look” all that significant.

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Think the bull market is long in the tooth at almost six years of age? Maybe not.

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We wrote in May the mid-year months of a mid-term election year are historically the weakest for the stock market from a calendar perspective. Large Caps, however, have mostly bucked that pattern.

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An update of our study on past bear markets, showing typical peak to trough declines in the popular market averages and the duration of these declines. Also look at past bear market rallies.

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Bulls may indeed have Christmas, but fundamentals for bearish case in 2008 are extensive.

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Major Trend Index turned "negative" March 8 and has continued to deteriorate.

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I know it may be difficult for readers to envision much of a market decline in the current environment. However, keep in mind that all bear markets are not “cyclical”. That is, some past bear markets were not related to the business cycle.

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In terms of amplitude, the bear market could be about half over. Typical cyclical bear markets decline 25%-30%. This is not a prediction, only the profile of a typical bear market decline. The current version may decline more or it may decline less.

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It continues to appear that the stock market is forming a major cyclical bull market top. The Major Trend Index continued to deteriorate in November and indicates the market is in poor health and a cyclical bear market is likely.

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With the October 30th calculation, The Leuthold Group’s Major Trend Index has shifted into negative territory. Thus, our disciplined weight of the evidence approach dictates a very cautious policy.

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For quite some time this publication has been maintaining that “the next cyclical bear market could be very similar to 1962”. At least up to now, the 1987 decline does indeed closely resemble 1962.

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This last month, a client and I were discussing what the stock market was like back in the 1960’s and early 1970’s. We saw a number of parallels with the current market.

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Recently, the majority of questions have, not surprisingly, concerned the liquidity driven market thesis. In second place are questions relating to today’s market and 1929.

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T-Bonds at their recent lows were down 30% from peak levels. Yes, it has been a bear market, but it may be about over. At minimum, a strong move to 11%-12% levels is expected before election day. Is the five-point move in recent days the 10 beginning of this? Maybe …

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The stock market is in the process of making a cyclical bear market low. The Early Warning Index for market bottoms has turned Positive. The Major Trend Index is Neutral. It is time to start buying stocks again with cash reserves but hold long bond positions for now.

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