The bear’s end game

But no one knows how long it will last

Finweek English Edition - - Creating Wealth - LU­CAS DE LANGE

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.

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