Just Your Average Bear Market

Includes: DIA, QQQ, SPY
by: Roger Nusbaum

I have been referring to the market action of the last six months or so as a normal bear market.

In the months leading up to the bear, I wrote repeatedly about why I thought a bear was coming, and most of that opinion was based on a very simple premise, which was: This time will not be different.

Normal, based on history, would be about a 30% decline from the peak over a period of time of nine to 18 months.

The length of the bull, the excesses that built up, the distortions in the yield curve and the slow-ish rolling over last fall that was denied by most folks were all classic signs of a bear market--one I still think will be a run-of-the-mill bear market.

It is a good bet that someone will leave a comment here or on one of the other sites where my posts get re-run noting concerns with some aspects of the current bear and why those aspects make this one different.

There is a tendency to expect the worst from the current set of current events. This has repeated many times over throughout history and this is no different. There is no getting through to the person so motivated by current circumstance that they leave a comment telling the world why I am an idiot for not realizing why this is different.

Assuming you're not that guy, think about what is on the world's plate at the moment. In no particular order we have very high oil prices with a big debate over why (for what it's worth, I think time spent wondering why is not very productive--what's the prize for being right?). Well, this is not the first time for that. Something is not right in the housing market (you can fill in your own adjective and magnitude), which has happened before. People are worried about the greenback and various deficits--surely no one thinks that is unprecedented. The banks are in trouble, Paulson says; that happens every few years.

There are more flashpoints than that, but there is nothing new about the big macro for any of them. The details of each one might be a little different but as these sorts of worries have popped up in the past, they have each engendered genuine fear only to all do the same thing; cycle through for a short while with much less actual impact than expected. The poster child for this effect (and I have mentioned it before) was from the summer of 2002 when CEOs were going to have to sign off on their earnings. Many of you may not even remember this, but it created real panic -- and was a non-event for the market.

None of this is to say you should do nothing. I've written at length about how I try to avoid down a lot, disclosed most of the steps I have taken along the way in belief of taking action when demand for equities becomes unhealthy. The context today is not to freak out and become emotionally unglued. People fear the unfamiliar and assume the worst, but markets have a way of working, and so far, this bear market is going exactly by the book.