​Bear Market Gaining Strength; Retest of October Crash Low Fails

Michael Markowski  |

On Friday November 23rd the S&P 500 failed in its retest to close above the October Crash low of 2641.25 on October 29, 2019. Had the S&P 500 passed the test, the probability was high that the index could have experienced a significant rally through the end of the year. The failure of the retest, along with the fact that all asset classes worldwide other than US Government Treasury bills are down for the year, have invigorated the secular bear market which began earlier this year.

The year-to-date chart below depicts both a successful retest and a failed retest of 2018’s crash lows for the S&P 500. After hitting an all-time high in January of 2018, the index crashed to a low of 2581.00 on February 8th. The February crash low was successfully tested on April 2nd when the index closed at 2581.88. With a successful test of the low, the S&P 500 began a new uptrend which resulted in the index making a new all-time high in September 2018. The S&P 500 subsequently crashed to its a crash low of 2641.25 on October 29th. The index successfully tested the low when it closed at 2641.89 on November 20th. However, instead of holding above the low to build a new uptrend as it had in April 2018, the index declined to close at 2632.56 on Friday November 23rd. The breaching of the October 29th low means that the S&P 500 will likely have to successfully test the February closing low of 2581.00 before another uptrend of the index can begin.

Even assuming a successful retest of the early 2018 lows, the probability is low that the S&P 500 will be able to get back to its all-time highs before the next US recession begins. As of November 23rd, the S&P 500 declined by 10.2% since reaching its September 2018 all-time high and is down by 1.6% for the year. Meanwhile US investor sentiment is now bearish as compared to being extremely bullish at the end of 2017, due to the Trump tax cuts. Additionally, all of the investors in the world have gone from being optimistic to being pessimistic. The chart below depicts that all asset classes have declined for 2018 with the exception of US Government Treasury bills. This is only the second time that this has happened since 1920.

All asset classes, other than US Treasury bills, declining simultaneously has put all of the world’s investors into a defensive posture. The turn in sentiment from positive to negative is the perfect environment for a secular bear market to thrive. The table below depicts the durations and returns for secular bull and bear markets that have occurred since 1802.

A secular market is a market driven by a macro trend which can remain in place for many years, resulting in the stock market going up or down for a long period of time. For example, in a secular bull market low interest rates and strong corporate earnings push stocks prices higher. In a secular bear market slowing economic growth, declining corporate earnings and rising interest rates cause selling pressure which pushes stocks lower for an extended period. Cyclical bull or bear trends which have peak-to-troughs that are shorter in duration occur during secular bull and bear markets. Cyclical bulls and bears should not be confused with secular bulls and bears.

The average annual returns of 0.6% for the secular bear markets with durations of 8 to 20 years in the above table do not paint a picture of the real risks that a secular bear can pose for investors. The table below depicts the secular bull market peak to the secular bear market troughs for all of secular bears from 1906 through 2000. The declines range from 58.6% to 80.7%. The number of years for the S&P 500 to eclipse its prior secular bull market high ranged from 13 years to 29 years.


Based on the statistics in the above table the best-case scenario for the S&P 500 would be decline of 58.6% from its September 20, 2018 all-time high of 2930.75 and the high being eclipsed in 2031. My rationale and the math which supports why a stock market is always in either a secular bull or secular bear phase is explained in my October 9, 2018 article, “Day of Reckoning Approaching for Market”. Stocks should not be bought and held during a secular bear market. It’s also very difficult to buy and sell stocks for a profit during a secular bear since the trader has to swim against the secular bear’s declining trend.

There are two strategies that I recommend during the new secular bear market. The first is to effectuate a 90/10 Crash Protection Strategy. There is a video at the bottom of the page which explains the strategy. The second is to subscribe to the Bull & Bear Tracker. Its green and red signals are utilized to trade two triple leveraged S&P 500, ETFs including the SPXL (Direxion Daily S&P 500 Bull 3X ETF) and the SPXS (Direxion Daily S&P 500 Bear 3X ETF). The signals enable an investor to make money from the market going up or down. The Bull & Bear Tracker is powered by an algorithm which reads volatility and capitalizes from it.

The table below depicts the Bull & Bear’s published and back tested track record for 2018, as compared to the S&P 500. Throughout 2018, the Bull & Bear Tracker’s signals have generated an average return of approximately 9% per month. The signals have had the highest productivity during 2018’s most volatile periods. For the October 4th to November 24th period, it generated a return of 7.0%. The January 1st through April 9th period generated a return of 62.2%. Year to date the Bull & Bear Tracker’s back tested and published signals have generated a return of 96.4% compared to a decline of 1.6% for the S&P 500. For more about how the Bull & Bear Tracker operates read my article entitled “Bull & Bear Tracker Gorging on Market Volatility”.

Subscriptions to the Bull & Bear Tracker are currently available for free. An automated alert and trade execution system is currently under construction. Once the construction is completed, Bull & Bear Tracker subscribers will be able to have their trades automatically and seamlessly executed by an online broker. To subscribe click here.

View the six minute “Profit from the Crash” video below to learn about the “90/10 Crash Protection Strategy”:

Below are my October 2018 articles pertaining to why the market will be substantially lower in the coming weeks and months:

Below are the research categories that BullsNBears.com covers:

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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