Tuesday, August 5th, 2008
Is the bear market over?
When deciding if we’re at the end of a bear market, it’s important to know what stage we’re at.
Bear market’s typically have three broad phases according to Dow Theory and as outlined in Colin Nicholson’s book The Aggressive Investor: Abandonment of hopes, decreasing earnings, and distress selling.
Phase One: Abandonment of hope
- Market overvalued
- Volume dries up, except for speculative darlings
- Market may climax in frenzy of speculation, then crashes
- Market ignores good news
- Series of profit downgrades or sharp tightening of interest rates dash expectations
- IPOs fail or abandoned
Phase Two: Decreasing earnings
- Lower earnings reported
- Former market leaders crash and burn
- General public lose interest in shares
- Fundamentals at reasonable values, but few want to buy
- Few IPOs
Phase Three: Distress selling
- Vulture funds formed
- Bankruptcies and failures
- Financial institutions fail
- Increasing fear prices will never recover
- Unemployment peaks and widespread financial stress
- Failures and mergers of broking firms
- Brokers cut staffing
Using the phases is an example of using qualitative factors; it requires observing the world and reading widely.
It appears that we are probably somewhere between phase two and three. My hunch is we need to see a bit more pain and distress selling before the bear market ends. But as usual, I could be wrong.
This entry was posted on Tuesday, August 5th, 2008 at 1:53 am and is filed under Bear markets, Market direction. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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March 16th, 2012 at 8:26 pm
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