The bear’s end game
But no one knows how long it will last
AFULL BLOODED BEAR market is being experienced now, with the world’s leading stock exchange – Wall Street – just having again confirmed there’s no indication yet of when the pain will end. In fact, experts in market psychology say what’s currently being experienced is a classic case of what’s known as the fear and panic stages of a bear market.
As the accompanying diagram shows, it’s clear from analyses of previous bear markets we haven’t yet reached the end of the hard-
It’s clear from analyses of previous bear markets we haven’t yet reached the end of the hardship.
ship. There are actually supposed to be two phases lying ahead: despair and capitulation. The latter characterises the turning point of a bear market, as the majority of investors have given up hope and are no longer even interested in discussing the bargains available. What then happens is the smart money accumulates shares at very favourable prices.
Those who had the courage to start buying at the first tentative stages of a bull market have ALWAYS made large profits: firstly the aversion (contempt) of investment in shares by many small investors, followed by doubt and suspicion. Unfortunately, research shows the man in the street only starts entering hesitantly during the cautious phase, after which comes growing confidence and the enthusiastic phase. During the latter he has a lot to say about the profit he’s making.
The very last phase of greed is also known as a fools’ market, because the one fool buys at a higher price from the previous fool and they all show a “profit” – irrespective of the underlying fundamentals. When the last fool has bought, the inevitable downtrend starts.
At the bottom end there’s also a fools’ market, when the man in the street, driven by panic and despair, sells quality shares at giveaway prices, justifying his action with arguments such as: “I don’t want to lose everything.” What that implies is that the decline will never end – which is impossible and simply illustrates the irrationality of a true bear market.
Where are we currently? There can be little doubt there’s fear and panic. At the same time other factors are coming to the fore, such as good value, accompanied at this stage by warnings from market commentators not to be in a hurry to buy.
Then there’s the phenom-
enon pointed to by a researcher into market panic, Stephen Vines, as an important indicator. It’s that fear and panic spread worldwide, like a contagious disease. That was particularly noticeable during the bear markets of 1929, 1987 and 2001. And now again, especially since the US House of Representatives has turned down the initial bailout plan of US$700bn.
Nobody can be certain when the pain will end. The one major consolation is that such phenomena typically occur in a bear market that’s already reached maturity. In other words, it’s the end game that’s being experienced – however long that might last.