Is the Structural Bear Market Nearing Its End?

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Includes: SRS, SSO
by: Toro

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.