Waking the Bear

This was in last week’s Barron’s but since I’m now on the high seas (and possibly without access to the web) you’ll have to make do with this terrific piece from last week.

You will note some of my very favorite marekt observers participate in this discussion:

"BYE BYE, BULL. HELLO, BEAR. THE MARKET DECLINE that began in early May could well signal the end of one of the longest-running cyclical bull markets on record.

That’s the conclusion of some top market watchers tracking technical indicators that have been strikingly reliable in the past. Supply-and-demand conditions have been deteriorating since last summer, and took a sharp turn for the worse in the past month: One index of investor demand, calculated by Lowry’s Reports of North Palm Beach, Fla., recently hit a 15-year low, while a related measure of selling pressure climbed to a three-year high. Forces like these have led to steep price declines and wild volatility — typical for the beginning of an end." 

Note: You can read my interview from earlier this year with Lowry’s CEO Paul Desmond for more on his methodology. Part I, Part II

"Rising interest rates, inflationary pressures, a weakening dollar and a negative savings rate all have conspired to bring this latest bull market to an apparent close. The tipping point, according to Venice, Fla.-based Ned Davis Research, came when the Federal Reserve’s discount rate hit 6%, mortgage rates reached 6.5% and the yield curve flattened.

It’s been a long time since the bear has shown his face. The current bull cycle began in October 2002, and since March 2003, has roared ahead without a 10% correction. Only the bull run from October 1990 through May 1996 was longer — 1,420 trading days without a 10% setback.

With the S&P 500 down 6% since peaking May 5, the end of the run could come soon. In fact, the tech-heavy Nasdaq Composite and the Russell 2000 small-cap indexes already are down by more than 10% from their highs in early May."

I’ve cited this statistic in the Cult of the Bear series, as well as here; Back to the discussion:

"We are in a bear market," asserts Paul Desmond, president of Lowry’s Reports, which tracks supply and demand in the stock market, using proprietary indicators developed more than 70 years ago. "It’s likely we won’t see a reversal for quite some time." He figures that the market may not bottom until the fourth quarter, or early 2007, coinciding with an historical trend of market lows in or just after the second year of presidential-election cycles.


The current decline is especially dangerous because many investors appear unfazed by the bearish signals: Investor sentiment remains positive, as expectations of a bounce or summer rally abound, leading investors to buy on dips. Hedge funds are still mostly bullish, as evidenced by a weekly survey conducted by Manhattan-based International Strategy and Investment Group. While less bullish than they were at the peak, hedge funds are still more optimistic than normal, despite the recent stock-market drop. Typically in a declining market, hedge funds would become less bullish than normal.

The Leuthold Group, a Minneapolis-based research outfit led by Steve Leuthold and best known for its historical and sector analysis of the market, alerted its clients recently that, based on more than 40 measures of investor sentiment it monitors, the market is "nowhere near oversold territory," despite the steep decline.

That’s a classic contrarian signal; the downturn could be deeper and more prolonged than is typical, precisely because no one seems concerned that the recent market upheaval is anything more than a passing storm.

Saying the market is "unhealthy" and in the "early stages of a new cyclical bear market," Leuthold warned clients in early June that a much higher level of investor "caution, fear and even some degree of capitulation" is needed before a bottom is reached. While not pinpointing a bottom, he suggests that a 5% decline in the S&P, to 1180, would bring the market to the "median valuation level" since 1957 — historically, a good level for buying. It would take a 15% fall in the Dow, and a 23% drop in small-caps, before a similar buying opportunity would present itself.

Waking the Bear
Barron’s MONDAY, JUNE 26, 2006   

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What's been said:

Discussions found on the web:
  1. edhopper commented on Jul 1

    I’m not the only one who has said this, but housing will bring this economy down.

  2. jolin tsai commented on Jul 1

    If a popular mag like Barron’s comes out and talks about the big bad bear, I’d happily take other side of the trade at least for the intermediate term.

  3. larytet commented on Jul 1

    i do not know about “Hedge funds are still mostly bullish”, but i see huge (HUGE) open put interest in SPY and QQQQ. such kind of support can not be broken without some really bad “exo”event

  4. whipsaw commented on Jul 1

    per larytet:

    “i do not know about “Hedge funds are still mostly bullish”, but i see huge (HUGE) open put interest in SPY and QQQQ. such kind of support can not be broken without some really bad “exo”event”

    hmm, not sure if I understand your reasoning about this. For one thing, I see more open call interest (just eyeballing the yahoo version of reality in spread mode) and don’t see how it matters anyway? Most options are not exercised, they are just bought by the dealers who wrote them and the net is just a bit.

    Please explain how open put interest creates a floor?

  5. EyeDoc commented on Jul 2

    Barron’s is chroncially bearish, so I tend to read them with a big grain of salt. Leuthold’s comment about the S&P needing to fall by 5% to reach a good buying level is interesting. Am I supposed to actually sell all my stocks, and wait for the whopping 5% decline, and buy them all back again? That doesn’t make too much sense to me.

    In any case, I’m invested in a way that a bear market won’t hurt me too badly, so I’m not gonna sweat it too much. I’d also like to know what the track record of Desmond and Leuthold are for predictions, and why I should care about what they have to say.

  6. Mark commented on Jul 3


    You can easily do this yourself. But for the record, Leuthold was all over the 2000 top and Lowry’s did groundbreaking work on the development of tops and bottoms AND called the March 2003 bottom and the October 2005 base recently. I am a client of neither.

  7. Babak commented on Jul 4

    Paul Desmond says: “…Investor sentiment remains positive…”

    huh? Has he taken a look at II, AAII, LowRisk, Market Vane, put/call ratio, and other sentiment readings? They all point to a very scared investing public.

  8. bob commented on Jul 5

    I disagree.

    I think the bull market ended in 2000 and the last 3-year action is just a dead cat bounce. I also think that the usual bear market takes about 15 years and we are 5 years in it. 10 more years to go. It’s not so horrible so far.

Read this next.

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