We May Have Already Entered A Bear Market

by: jsIRA

Knowing the market's future direction will help us to make our investment decisions. It is generally believed that if the market made a more than 20% down move from its recent high, it will be considered to have entered a bear market.

S&P 500's recent high was 1,370.58 achieved on May 2, 2011. A 20% down move gives us 1,096.46. Last Monday's close of 1,098.92 was only 2 points higher than the bear mark. The market actually traded as low as 1,074.77 in Tuesday's trading session, but it closed at 1,123.95, and further rallies brought it near to its September high. Therefore we are not officially in bear market yet.

But stock performance since April-May high gives us a completely different picture. We scanned our database during the weekend and following are some of our findings:

  1. 67.5% (two third) of stocks have lost more than -20% from their April-May highs.
  2. The average stock has lost 29.60%.
  3. Among all the stocks, 15.9% lost more than 50%; 28.68% (more than one in every four stocks) lost more than 40%; and 47.47% (nearly one half) lost more than 30%.
  4. Only 5.5% of stocks gained since April's market high.

Let us check what stocks (sectors) have been hot during the last six months:

  • Food Chains: PZZI (Pizza Hot +37.55%); DPZ (Domino Pizza) +6.86%; MCD (McDonald) +5.42%; SBUX (Starbuck) +5.40%;
  • Retail and Department Store, Wholesaler: STMP (stamps.com) +82.30%; LQDT (Liquidity Service) +50.52%; PSMT (PriceSmart) +47.76%; WNI +23.62%;
  • DLTR (Dollar Tree) +21.87%; SUSS (Susser) +33.69%; BTH +22.87%; CROX +10.93%; etc.
  • HealthCare Related: PCYC +69.26%; VRUS +49.44%; MELA +46.19%; QCOR +33.03%; STAA +31.93%; VHI +31.32%; ALXN +26.89%; ELGX +26.02%; JAZZ +20.68%; ELN +10.87%
  • Gold and Gold Miners: GRZ +31.18%; NXG +17.22%; GOLD +11.24%; NEM +6.52%; AUY +5.56%;
  • Utilities: MGEE; ...

Most of those stocks are defensive in nature and performed well during recession. In addition, 96.88% of stocks currently run under their 200 day moving average. This further confirms our view that the market has entered a bear phase.

Our view is that it is just a matter of time before the S&P 500 closes below 1,096. And once the stock market runs in bear phase, it takes months to repair the damages.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.