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We're Entering Bear Market Stage 3

May 05, 2020 11:49 AM ETSP50094 Comments
ETFOptimize profile picture


  • The first stage of a bear market usually consists of a very sharp selloff, as investors simultaneously realize that things have turned very sour.
  • The second stage of a bear market is an equally sharp, countertrend rally as stocks snap back from oversold lows to recover part of the recent loss.
  • Stage three of a bear market is when stocks resume a slower, more grinding downtrend as investors slowly accept the fact that conditions have definitively changed. This stage is beginning.

Bear Market Stage 3 Begins

Stocks Entering Stage 3 of a Bear Market

The first stage of a bear market usually consists of a very sharp selloff, as investors simultaneously realize that things have turned very sour, which results in a rush for the exits and a rapid drop in prices. We saw this occur from February 24 to March 23, when the S&P 500 lost -34% in about four weeks – the most rapid selloff of this magnitude in history.

The second stage of a bear market is an equally sharp, countertrend rally that sends stocks back higher from oversold lows to recover part of the recent loss. After the selloff, bullish investors and day-traders come back into the market to cause a short-term surge in prices higher. This rapid gain makes many investors think that the fundamental economic problems will be solved immediately, and the selloff was just a short-term correction. As usual, many pile into stocks at the end of this bear-market rally, only to lose their shirts as the market enters stage three.

Stage three of a bear market is when stocks resume a slower, more grinding downtrend as investors slowly accept the fact that conditions have definitively changed, and the buy-the-dip mentality that worked for so long is now a losing game. This pattern defines the stage that stocks enter this week, with the S&P 500 has reached a point of substantial resistance.

As shown in Chart 1 below, the S&P 500 SPDR ETF (SPY) bounced from the March 23 low to gain about 34%. The ETF is now running up against its 200-day exponential moving average, which coincides with the 61.8% Fibonacci line at the same level. These are two potent resistance forces that won't be very easy for the index to break. Not impossible – just extremely difficult. Also, after the robust, rapid gain off the

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Comments (94)

The FED would not be able to recognize inflation even if it fell over it.
Peter Cooper profile picture
Nasdaq is pretty much at a classic double top and the S&P 500 not far behind it. My article in The National today goes into more detail: www.thenational.ae/...
Can we even say we are in a bear market at this point? We are well off the 20% lows of March. Some could argue we are in another bull market. The Fed has made it clear that they will do "whatever it takes" to keep the economy afloat. For now, that means more sugar for the market. The Fed kept interests artificially low for nearly a decade after the financial collapse. They will do the same here as well. I would think it would take inflation at 5% before the Fed started cooling down the economy. As long as their is Fed liquidity available, I don't see the markets taking a nose dive. While I don't see the markets reaching back to their all time highs. I can see the Dow at 27,000 by the end of the year. Until the Fed takes away the crack pipe, I think markets will move moderately higher.
ETFOptimize profile picture
"As long as there is FED LIQUIDITY AVAILABLE, I don't see the markets taking a nosedive."

Not to pick on you – @ralphmtsu – but this 'bullish logic' (which we're seeing run rampant across the pages of SeekingAlpha) is disconnected from the most basic fundamental tenets of business. Specifically...

LIQUIDITY' – as supplied by the US Federal Reserve – DOES NOT EQUAL CORPORATE PROFITS – which is the primary driver of STOCK PRICES.

With the consensus forecast for 2nd quarter GDP now showing a drop of more than -30%, accompanied by 33 million Americans (from a workforce of 150 million) filing for unemployment in the last 60 days, and the daily toll of deaths expected to increase in the US by 50% – climbing from 2,000 DEAD every 24 hours to 3,000 DEAD per 24 hours, the economic news in the coming weeks is about to turn VERY, VERY SOUR.

However, our firm doesn't pay attention to these news items! Instead, our robust collection of 38 proprietary quantitative indicators removes the noise and identifies times of increased risk, thereby avoiding market corrections and crashes BEFORE they occur. Those signals had already switched our most conservative models to cash or defensive ETFs WELL BEFORE the selloff began in earnest on February 24.


Although we had been warning of a coming selloff throughout the months of January and February, we published an article on our website ("TOO FAR, TOO FAST2020 - etfoptimize.com/... that CALLED THE TOP on FEBRUARY 20 (four days before). For the sake of posterity, we also republished it a few days later in our Seeking Alpha Blog at this link: seekingalpha.com/...

Many of those same proven indicators – integrated into highly sophisticated combinations that have provided a collective record of 81 out of 81 WINNING YEARS – are now saying that stocks are about to head down again as the Bear Market resumes rolling downhill and picking up steam.
KennethY profile picture
If you keep calling the top for the next 6 months, you're bound to be right. At some point, the stock market HAS to go down at least a little... maybe when we hit Dow 30K. Timing the market is a truly daunting task when at any moment, the Fed can announce any of the following which will drive stock markets through the roof:

1. Negative interest rates. (market already expects Fed to cut rates to negative...let's see if the Fed obliges. They've been at the beck and call of the markets for quite some time now).

2. Fed starts buying equities/ETFs. Why not? They've already announced they'll buy corp bonds and now junk bonds. Why not stocks too? Yellen already suggested as much.

3. More bailouts and free money for large corps. $25B for airlines is just a start. Another $3 trillion stimulus waiting in the wings next week when Pelosi sends her bill to congress.

One thing is for certain -- the Fed will never run out of ammo. 0% Fed Funds rate. Out of ammo now? NOPE. Fed wants to buy junk bonds. Out of ammo now? NOPE! Billions of forgivable bailout money for airlines. Out of ammo? NOPE! Unlimited QE! Out of ammo now? NOPE! Not even close...

Negative Fed Funds rate. Unthinkable right? NOPE! Market expects this to happen now. Fed buys equities? Unthinkable right? NOPE! Yellen even alluded to this as a possibility.

They have done so many unthinkable things that are both disgusting, unpredictable and will pump the hell out of the stock market.
Kal Telage profile picture
Horrific global human and economic loss growing daily will take an economic toll on world markets. The butchers bill is increasing daily and the total is climbing. The fix is difficult and will not be quick. It’s time to manage risk!
DWD Investing profile picture
DWD Investing profile picture
@Kal Telage

At which time the "stock market" turns into a Ponzi game, with Federal Governments pumping as fast as they can.
Another bearish article on SA. It seems every time we have a little downturn we get a little bump and vice versa. Unless we get really "bad" news it seems unlikely we go "much" lower. Earnings are already priced in from Q2 and Q3. Bad news would have to be a 2nd wave of coronavirus shutting down things again, perhaps strong tariffs on China or some unexpected or unforeseen news. While these could very likely happen we likely won't know anytime soon. Thus, stick to your plan. Buy on dips when it seems reasonable to do so. I'm not a trader but it does seem the optimum time to do a little when some get beaten up on down days.
ETFOptimize.......Great article, refreshing to come across analysis that is similar to my thoughts....... Well it took cv19 to get us from nose bleed city to where we are today. Next up will be Sept thru Nov of this pandemic that will have potential to wreck havoc that will be defined as wave two, if the 1918 playbook is followed according to virus rules.......... Just saw some stat about employment of 30 million lost jobs in April and in the GFC we saw about 900K for the same month...........

That third top in this up rally is a sure sign of lost momentum...... we shall see what is up next....... invest accordingly
SilentRage profile picture
How much do we have to pay to read about Stage 4 and 5?
jprizzuto profile picture
please define secular. to wit, "...Stocks are in a secular bear market..."
Generally the term secular refers to the trending direction of the market and it implies time. For a bear market we would be thinking of a secular trend as one that lasts at least a year or more. Some bears have lasted over four years. The severity can vary. I agree with the author in this case. The damage being wreaked on our economy is only part of the problem since the real force of this is global in nature and therefore there is no region or country that can keep the lights on for the restart to happen. It is the most dangerous bear market that I think the world has ever seen for its abruptness, breadth and scope and I doubt it ends before two years has passed.
jprizzuto profile picture
@PM Analyst - thank you but i have my own 'opinion' on what a secular bear market is. btw, it is definitely longer then one year. four years, maybe. but i would consider a bear market as a secular trend to be decline of at least 20% and not recapture the prior high for about 7 years, if not longer.

i wanted the authors opinion because i believe that was an absurd statement to say we are in a 'secular bear market' only ten weeks after the february peak and i wanted him to defend it. even if it takes two years (as you said) to recover the prior high, that would be cyclical bear market in an ongoing secular bull market (imo). however, i doubt it will take two years to recapture the prior highs. we shall see...
Believing the "v shaped recovery" is anything but an illusion fueled on Fed drugs is pure wishthinking. The only reason why the markets "rebound" is the immense inflationary effect of the fed trillions. For investors in the stock market this might work out just fine, ( for some time), but please drop the bullshit about a real recovery when every possible bit of data suggests we re heading for a massive recession.
Given a vaccine is developed by end of year, worst that’ll happen is that maybe 30pct of economy will be on hold and some others will limp along. Investors may stay low but not be entirely immobilized. The guess is between government and corporate initiatives the gap can be bridged. I stay in, understanding the competition is in the same mess. Also, investors are not necessarily moved by the latest GP figures
DWD Investing profile picture

Even if it is "developed" end of year, it won't be ready for market for another year, give or take a couple months.
Ah, but the ironclad promise of it will lift all spirits, and at that point people will relate the numbers of clean vs infected vs survivors vs those that didn’t and the draw their own conclusions
Dale Roberts profile picture
But we didn't even have a real correction yet, ha. Or does that record breaking down and back up count? Not sure that registered much.

There was brief shock and then saved and over.

For now.

Lord100 profile picture
All MEGA Techs are MASSIVELY overvalued. Especially MSFT, AAPL and AMZN. Feds are distorting Mkts. Sell rallies makes sense at these levels.( massive short squeeze are in place so avoid shorting for now)

Mkts just overvalued 5 stocks making up 24% of entire us mkt, is insane and risky.

-- MSFT(1.4T, PE35) debt 90B
-- AAPL(1.35T PE26) debt 130B
-- AMZN(1.3T PE 110) debt 125B
-- GOOG & FB(1.6T PE 30) debt 40B

The tech as a whole are most overpriced like tech bubble or even worse, most techs are going to fall 40-80% at these valuations over time.

-- Global
loss of 30 TRILLION GDP so far and counting. Even lockouts are lifted the recovery will take 2 years plus.
-- Massive unemployment 190M global estimated. In 4 weeks 30M in US
-- Buybacks down 50-70%. Biggest buyer for the last 4 years of nearly 1Trillion/year.
-- Rollback of taxes next year.
-- Job posting down 40%.
-- Re-occurance risk, we are already seeing this in Singapore, Portugal and few other places.
-- global debt now > 300T. US > 65T.( CONSUMER debt all time high 15T, CORP debt 15T, US Fed debt 25T. Muni, student loans etc )
Your article seems to be saying: Look it is down. Wait now it is up. Never mind, it is down again.

Will your follow up article states that it is going up again?

It might be helpful is you give a little evidence for your three stages of a bear market so the reader knows that you aren't just making it up (a problem on this site).

Not expecting a novel...just maybe show at least one other bear market and how it went through your three stages.
Jogo Tyree profile picture
The bulls on here seem to be saying that stock prices being disconnected from economic reality is the 'New Normal'. Not surprisingly that generally doesn't work out very well for them.
A.K.A. "This time is different."
bluescorpion0 profile picture
And how sure are you this scenario plays out as your 1-2-3???
My put options won't be of much value until these retail investors wake up and smell the coffee
Gman54 profile picture
We've had a lot of positive virus news that rallied the market and now opening up the economy is the last of the good news. When the reality of how bad the economic damage is hits and drips on the market the next 4 months, it will be the negative that rules. I laugh when I hear pundits say the market is "looking through 2020 and the coming bad news". If that is the case, then why didn't the market "look through the pandemic" and not go down at all. Why didn't we just stay at Dow 29,600? That is moronic. Why don't we just "look through" all the bad news to the market the next 10 years and just go directly to DOW 50,000? What meds are these clowns on?
When I buy a company, I want to know it will be in good shape in 3, 5 and 10 years. That's all it means that "the market" (you and I) is looking through this. I doubt very much this pandemic is going to put ALL large cap tech companies out of business. Most of them are making more money lately...
Gman54 profile picture
I agree with that explanation segfaultnh. We all buy on that premise. The people I am referring to people are using that as the reason we will have a V recovery and the market will continue to climb, like the damage is irrelevant. All companies that are viable will do well in the next 2 years plus. I am not saying they are going out of business, only that they will not be at full health by the end of the year. I think the market will do some retracing on the coming economic news. How much? That is a waste of time to predict. I just do not see this overly optimistic return to previous highs just around the corner. Too much happy talk. I am a realist, not a pessimist or optimist.
Agree that our fears in this respect are a bit overblown. Good skills don’t just die. Government knows this needs to be supported for a while
LongLegend profile picture
@KennethY Future is difficult to be exact. Probability is one Solution. But the most important factor currently is:

Financial and monetary policy has boosted the market and created a separation between the economy and stocks.

That mean that positive analysis is not the better one.
KennethY profile picture
@LongLegend Agreed that there is a huge disconnect between main street and wall street. However, there is no limit to what the Fed can do to pump up the stock market. At least, for the short to intermediate term. They are rigging the system. They will continue to rig the system. It is not a free market. People expect the game to be played fairly. It isn't. Fed rigged the dice and it's coming up 7's and 11's every time.
LongLegend profile picture
Yes I agree. But soon more than 50 % in the US will be not working. That mean they need money and probably selling stocks or got that from the retirement money account. What is their future? Slave? Will they get a job, at what conditions?

It depends on the next 2 months. You will get money from the government. Yes you can get it. But it will come the time someone must that pay back. Earn money at the stock market and give it back to the government.

Its not always so clear as it seems.

Buy stocks, use gains to invest in physical gold and bitcoin?

Something will change. Bill Gates Equation is: CO2 = P x S x E x C. Is that our new future? They elite working hard for that. P is really strange. Hear "P" more times if you will dont get it.

“But soon more than 50% in the US will not be working. What is their future? Slave?”

What world do you live in?
jz10 profile picture
All these guys fighting the Fed needs to take a good look at the Venezuelan stock market. www.bloomberg.com/...

Hopefully this will clear up some misunderstandings on what really drives the stock market. As for all those people asking if it is possible for the stock market to outpace the national economy by any arbitrary margin, the answer is yes. Print enough money and you can make the stock market go up to whatever the central bank wants it to be. There is going to be a massive transfer of wealth from people who are long dollars to the people who are short dollars, such as the Federal government.

The market will go up to even more insane valuations once those dollars on the sidelines right now realize what is happening. Many companies will go bankrupt and many more will become zombies that can never generate enough free cashflow to pay shareholders again. With the Fed driving private capital out of the bond market via QE unlimited, more and more cash are going to be crowding into the stocks remaining that can still offer positive shareholder return. Any stock that is undervalued will likely be taken private, so the only choices left for public market investors are going to be between overpriced and severely overpriced.

Right now stocks are only overpriced. Better get onboard before they become severely overpriced. People who still think that assets will reprice to offer a "reasonable" return are living in the distant past. The main source of returns going forward will not be earnings, but capital gains from front running the Fed and former bears who become desperate for yield.
LongLegend profile picture
@Jz10. I dont take a direction to the western stock market. But take in consideration that the Venezuelan stock market increased 3 times but the Venezuelancurrency is only 1/3 in the same time. Means stable for those which invest in stocks. Additionally the US is working to delete the current government. That is against the international law.

The western currency are stable because not only one country, more all western countries do the same. Print money. So there will be an other compensating valve which will implode.

You must have an part of physical gold. That is one but you could right that the stock market will increase huge because the compensating valve will lead to them.
six-oh profile picture

I like your analysis. It's is a little overdone in parts. My view: First we have deflation for a couple of years, then we have severe inflation for several years driven by the race to find any sort of yield. Where I differ with you is on stock market valuations. I think we see a continued uptrend, perhaps to all time highs, before we see another big move down to lower lows. The reversal to the downward trend is coming, and is inevitable. When you might ask? My educated guess is Oct/Nov timeframe. Christmas this year will require an extra snog of your favorite beverage to get to "merry" status.
jz10 profile picture
@six-oh commodity price deflation can co-exist with asset price inflation, we just had 10 years of that. It really depends on the distribution of wealth in society. As long as the wealth does not trickle down to the bottom 80% or trickle down only very slowly, we don't have to worry about commodity inflation.

Whether or not we have commodity inflation really depends on the income/wealth redistribution policies of the government. I'm not too worried about this because we will have plenty of warning and plenty of time to reposition.
KennethY profile picture
I've lost count of the number of bearish articles on SA. This one has to be at least 1 of 10 now...maybe more. And every time I see one of these negative articles get published, the market goes up another 100-200+ points. Right now, the Dow is up another 180 points on the futures market. Tomorrow is going to be another big day for the stock market.

Every one of these authors who are negative on the market seems to be relying on logic and reason for why it will go down. But seriously, when will you guys learn? It's all about the Fed. You all underestimate the power the Fed has on the stock market. You thought the Fed was out of bullets when they lowered the interest rates to 0%. You thought they were out of bullets when they started unlimited QE. You all thought the Fed was out of bullets when they announced they were buying junk bonds. When will you finally admit that the Fed can print their way out of any situation -- maybe when they start buying ETF/stocks? That's probably the next step if they're already buying high yield bonds.

Seriously you guys...wake up. The Fed has rigged the stock market. They want it to go up. You can fight the Fed at your peril. How much money do you have to go short? They have infinity dollars. They can print forever if they wished. There's nothing preventing them from doing it. The only person who can fire the Fed is Trump and he's loving it. Stock market at all time highs while 33M+ unemployed? Sure why not!

The Fed board is not an elected body. They are appointed. You can't vote them out. There's nothing you can do to stop the Fed except hope that the next administration decides to FIRE Powell.
c0nst profile picture
That's how it works. It is much easier to write negative article and then say "It's all Fed with printer". And in a rare case market would actually bottom - "I've predicted that!".
Valued Rug profile picture
So it’s a new paradigm? If the game is rigged and it all come down to the whims of the government, then we’re truly playing roulette here.

Or... it’s rigged short term, so they managed to put a temporary floor under prices, but given time that floor will collapse and the “new paradigm” will prove another false dawn.

The problem I have with many of the comments here is that if the market isn’t doing exactly what someone says it will RIGHT NOW then they must be wrong. Things will play out in due course - say, the next 6-12 months
These money which the Fed is printing are money borrowed from the future. They don't care about next generations that will come and have to pay the debt.

Also it is very strange that this is happening in an election year..... don't you think? Maybe this is the real reason why all this printing is happening after all. 😉
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