The latest research report print and distributed by Birinyi Associates, Bear Market Strategy, analyzes and discusses every bear market of the last fifty years. From this analysis we can draw several conclusions:
- Don't Call the Bottom: The idea that capitulation occurs at market bottoms is a myth. There have been times when extreme selling or negative sentiment has occurred at a market turn, but based on a historical perspective we are not able to determine what the so called magic number is that would indicate such an extreme. Markets are actually more apt to make a subtle or sometimes unexpected turn from red to black.
Timing Matters: The majority of a bear market decline and also the majority of bull market gains occur in very specific time periods relative to the cycle.
This Bear Market Is Different Than Any Other: We are fond of pointing out that in fact all markets are different, but this one has thrown any kind of historical perspective or market tool out the window. Most notably, the decline in the S&P 500 has been as severe as any of the last fifty years, but it has occurred in half of the time. Typically declines such as the current one occur over two years, this has taken just over one. Expecting a bottom because we have declined as much as other bear markets is simply not credible.
Many commentators have compared this decline to those of the 1930s. While it is true that there were similar declines in the 30s, the market was very different then. There were about 650 NYSE listed firms in 1930; today there are 1,871 with another 2,967 on the NASDAQ. The fact is that modern market technology, transaction speed and the availability of trading stocks makes this market very different from that of the 1930s.
What can we draw from this? Anyone using historical perspective to forecast for this bear market should be ignored. Birinyi Associates' analysis indicates that there are strategies to be followed, but the best advice is to remain very cautious. The market continues into uncharted territory, and anyone commenting on its path is purely speculating.