Anatomy of a bear

Nicole Elliott

Anatomy of a bear

Stock market pundits love telling us that a 10 per cent fall in the value of an index is a correction while 20 per cent is a bear market. Quite frankly these backward-looking descriptions have no predictive value, are of no comfort to investors, and are of little use to IC readers.

Let's see if technical analysis can do any better. We look at four very different bear markets, overlay current conditions on these, and see how deep and for how long declining share prices might persist. And remember, indices are always going to do better than all individual shares as companies whose share prices are growing strongly must replace laggards in the calculations.

First, the stealth-bear which creeps up catching most people unawares. This was certainly the case for me in October 1987 with the Dow Jones Industrial Average. Having moved cautiously across the page around the 2600 level during the summer the break below 2400 unleashed a slump to almost 1600 within the week. Even more extraordinary was the way it then reverted to snaking along at the 1900 area. Price action like this is indeed a black swan and unlikely to occur any time this year.


Dow Jones Industrial Average


Take the perma-bear, which I mercifully cottoned on to early when spot gold prices dropped from a then record high in 1980. This saved an awful lot of heartache and pointless worrying over the next two decades and made lending physical bullion in the wholesale market a far more interesting proposition than owning it outright. Some say only commodities move in such long and slow cycles; we disagree. Just look at the Nikkei's price action since peaking in 1990. Current loose monetary policy might lead to prolonged price declines - interspersed with strong countertrend rallies - in many stock markets over the coming years. Note: mature markets peaked in 2007, emerging markets some five years later.


Spot Gold


Then the speedy-bear, sudden and shortlived, and in hindsight a gift horse we should have spotted. This was the case for the FTSE 100 index in 2008-09. Peaking once again ahead of the psychological 7000 level as it did in 1999, the index then almost halved. There is a chance that this might occur for a third time in the UK, that the drop has already started, and that the faster we move south the sooner the end will be in sight.


FTSE 100


Finally, the schizophrenic bear, or more correctly, the market with a split personality. A classic example of its kind is China's Shanghai Composite index which regularly suffers from bouts of extreme euphoria and speculative excess. This results in a parabolic rush higher which, as is nearly always the case all around the world, is followed by an equally impressive implosion of appropriate magnitude. Note that the secular trend since 1990 is to higher prices, but 2007's nonsense should have set alarm bells ringing this year. Why is it that the greedy never seem to learn? Cold comfort, and further losses to the 2000 level are likely, but the speed of the unwind so far means that in terms of timing this index is probably going to be one of the first to find a new interim base.

Moving averages, Coppock and other trend following systems are already bearish; now look for chart patterns to complete complex long term tops, then prolonged declines.


Shanghai Composite


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