Is the Structural Bear Market Nearing Its End?

Having been unplugged for the first four trading days of the week and having no connection to the financial markets other than the Internet and periodic updates on CTV Newsnet, my reading of sentiment is not in real-time.  However, I have been catching up on my backlog of readings, which piled up over the past month, and what struck me was the intense negative sentiment of almost every commentator I read.

Now, the tens of readers who have followed this blog over the past few years might have the impression that I am a perma-bear, given my general negative tone since I began wasting time feeding my own ego writing Running of the Bulls.  I am a cynic and skeptic - how could you not be when you work in the financial services industry? - But I do not live in a perpetual state waiting for imminent doom. 

(This is unlike my otherwise friendly and engaging neighbor, who has 40,000 rounds of ammo and guns at every window, waiting for a recreation of Lord of the Flies when the next hurricane strikes, which will almost certainly never happen given that we live many miles from the ocean and a category- 5-storm surge, would come nowhere near us.  As a Canadian living in America, I find this highly unnerving.)

I have been structurally bearish on the market for the past decade but have taken opportunities on the long side when presented.  I think one of those opportunities is now.  I have eliminated my remaining small short position in REITs through the sale of the ProShares UltraShort Real Estate ETF (SRS), and have been buying the ProShares Ultra S&P500 ETF (SSO).  I do believe we are in a bear market, and will be in one for a while, thus this is a trade and I have placed tight stops under my SSO long in case I am wrong.  The bearishness in the market is so overwhelming and seemingly so obvious that a move to the upside is what would be the greatest surprise to most investors, in my opinion.

It goes without saying that you should not do what I do.  Assume that I am wrong.  Instead, make your own decisions based on your own analysis, not the opinions of an anonymous blogger.

I believe that the market is in a trading range with a downward bias, and stocks will at least surpass the average bear market decline of 30% top to bottom, which means the S&P 500 has at least another 10% more to the downside.  It is also important to note that the broad-market declines in the two worst bear markets over the past 40 years was a 43% decline in the S&P 500 in 2000-02, and a 48% loss in 1973-74.  If you use those two bear markets as frameworks, we are about halfway through the sell-off, though I think you can make a very strong argument that stocks will not fall as far.

Thus, I think that we are at least half way through this cyclical bear market - which started with either the top in October or the first violent downdraft in March of last year - in terms of return.  In terms of time, I think the ultimate bottom will occur next year.

A potential bottom in 2009 may be the ultimate bottom of the structural bear market, which either began in 2000 when looking at the broad market indices or the beginning of 1998 if you look at the average stock.

I may be wrong, of course.  We may not bottom until 2010, 2011, or 2012, I don't know.  The point, however, is that we should start looking for a structural bottom in stocks as I believe we are closer to the end of the structural bear market than the beginning.

Disclosure:  The author owns SSO.

 

Comments

[investor88:]

Toro's article is logical, I have no quarrel at all with going long SSO WITH TIGHT STOPS in case it is wrong. The logic of the article seems to be contrarian investing, the worst of the downturn is behind us. Will take bigger trading positions [with stop loss in case wrong footed]if the uptrend manifests itself fundamentally and technically.

2008 Jul 27 06:57 AM

[bold4gold:]

Wow, honest -tell it like it is - commentary! Refreshing. I have to agree. Traders need to tread very carefully in this market.

2008 Jul 27 09:11 AM

[Randy Fay:]

My guess is the market bottom will be in 2008, perhaps even in the rear view mirror. Support for this positions rests on the idea that even though consumers have been beaten down, the SP500 companies balance sheets are quite strong (excluding financials), and earnings aren't that bad. Other support comes from the extreme bearishness present on the street. A great contrary indicator.

2008 Jul 27 10:48 AM

[lex:]

u kidding me??????????

2008 Jul 27 10:51 AM

[Alphameister:]

Valuations were much higher in 1972 and 2000, but offsetting that positive factor is a level of economic risk that seems much greater today.

2008 Jul 27 10:57 AM

[CLH:]

The bear hasnt started yet but I believe we should take a positive attitude. Remember the upside is unlimited while the downside is not great. There are a huge number of shorts (usually wrong) and few people who are sellers. When the selling stops the buying will begin.

2008 Jul 27 11:01 AM

[RossQ:]

the short side of the market is very crowded.

More than $1.4 trillion of worldwide equities, approximately 2.8%, is on loan... about one-third higher than at the start of 2007. And most of that is going to short sellers.

Short selling on the New York Stock Exchange rose to 4.6% last month, the highest since at least 1931.

It seems inevitable we're going to have a big rally, just to shake out the weak hands from the short side.

** From Growth Stock Wire **


Me i'm 70% short and 30% long, and way too comfortable. Thight Stops anyone.

2008 Jul 27 11:33 AM

[RossQ:]

Tight Stops that is

2008 Jul 27 11:34 AM

[E Nuff Sed:]

The consensus seems to be that we are closer to the bottom than the top.

Buy strong companies with a moat and good dividends and stop worrying about the bottom. Dollar cost averaging and time will take care of market risk.

One can of course buy "puts" on S&P to protect against further declines.

2008 Jul 27 01:32 PM

[bearfund:]

If short selling is the highest it's been since 1931, I suppose that means we have only 8 more years to go before a major war finally kills millions of people and, by accident, the bear. How uplifting!

2008 Jul 27 01:54 PM

[Steven Hansen:]

do we really have enough data on the depth of the credit crisis to make any predictions?

2008 Jul 27 09:23 PM

[Did U Think...:]

How can we exit the bear market when we are broke, in debt, our credit is cutoff, and prices are rising os every day consummables while jobs slip away? Where is all this value coming from that will save us?

Greenspan said that this will be the "most wrenching" time since the end of WW2. I don't know about you, but I don't really feel all that "wrenched" yet. Yeah, gas and groceries cost a bit more but it's not changing my life very much.

It will get much much worse than this. Expect economic bomb after economic bomb to continue to drop until we have a huge panic wahshout sell off which takes us down to Dow 7500.

2008 Jul 27 10:34 PM

[Martin Z:]

with the worst housing market in 50 years, rampant inflation, hollowed out banking systems, no economic growth engine, we get to the bottom with 20% loss on the Dow from record high. We deserve some celebration.

2008 Jul 27 11:14 PM

[lex:]

i agree with ponzi...dow to 7000. From Jesse Livermore.."It takes buying power to push stocks higher, but stocks can fall under their own weight".

There is only buying power when there is a bull mkt. There is only a bull mkt when there is confidence.

2008 Jul 28 02:41 AM

[cynic69:]

You guys are way way too optimistic. Never in history has energy been this expensive in relation to salaries. There is zero chance that the price of oil is going to get any cheaper. This problem makes all the other crap look like a picnic. I believe that the market may never recover its upward trend. The stuff that industry generates is worthless if the consumer can barely afford to eat and keep warm. Our go go growth civilization is polluting the earth to death and I say good riddance.

2008 Jul 28 04:14 AM

[Did U Think...:]

Nobody can say how a short term trade will turn out. End of month games and the impression that the gov't will be able to bail out everyone in the markets could leave you a winner in the short term.

But this is a bear market and we will see a "dislocationday" at some point - 20% crap out for the Dow. But short term who knows. When you get conviction about something instead of just tossing the short term dice, let us know.

2008 Jul 29 08:38 PM

[Laocoon:]

I disagree. Almost all bear markets last nearly as long as the Bull that preceeded. And the purpose, at least in part, is to get PE multples dowbn to fair value or below. If that is true of this Bear then we have a long way to go.

2008 Jul 30 12:55 PM

[buyitcheap:]

John Mauldin has a great line in his commentary fromthe other day: "For the record, there's no record in history of a bull market starting at a P/E of 18."

Opportunistic with tight stops, and buying it cheap or staying in cash is the right thing to do right now.

2008 Jul 31 09:48 AM

[phdinsuntan...:]

SKF on short squeeze friday

2008 Aug 22 11:47 AM