As that Tyler Durden fellow of zerohedge.com has pointed out, there has been a sudden surge in interest over the “bear market” in recent days, which last happened at the start and during the so-called “Great Recession” of 2007-2009.
If you think about it, it’s quite understandable, given the prevalence of pessimistic news on oil and China, as well as dropping equity indices since last year. But what does all that have to do with the forex market, you ask?
Well, that probably means that you missed out or forgot about our School’s lessons on The Relationship Between Stocks and Forex. So, are global equities in a bear market? But before that…
What’s a “bear market” anyway?
Ah, such a simple question, but arriving at an adequate answer is rather complex since there are differing opinions on what the definition of a bear market exactly is.
Our School has a lesson on Knowing Your Trading Environment wherein we discuss trending markets and such, but we don’t really have a clear, technical definition of what a bear market is, so consider this write-up as a sort of supplement or primer.A bear market is generally and technically defined as a downturn of X% lasting for X number of months.
How large the downturn is and how many months are needed usually depends on who you ask, but the definition that has gained popular acceptance (since it’s what Wikipedia and Investopedia carry) is that a bear market is a downturn of 20% over a period of two months or more.
Let’s take a closer look at Investopedia’s definition, shall we? According to Investopedia, a bear market is…
A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.
Let’s go ahead and break that down into bite-size pieces. The most important elements of a bear market are the following:
- Prices are falling, with a downturn of 20% or more
- The downturn lasts over a two-month period or more
- Negative sentiment is self-sustaining
Investopedia also includes a fourth element – that a downturn applies to “multiple broad market indexes.”
However, I find that too constricting since a lot of people apply the concept of a bear market on specific sectors or even specific asset or investment classes.
You can, for example, hear pundits talking about the current bear market on oil, even though oil belongs to broader market indices, namely various commodity and energy indices.
Let’s apply what we learned today on a monthly chart for the S&P 500.
If you didn’t get it yet, that there shows the recent bear market during the so-called “Great Recession” of 2007-2009. Price had a peak-to-trough loss of around 57%, with the bear market lasting for around 17 months, although the bear market only became validated around July 2008 when losses first reached the 20% mark.
And on that note, we just met the first two elements of a bear market. As for the third element, the one about self-sustaining negative sentiment, we’ve already got that covered since this was in the wake of the subprime mortgage crisis and the global financial crisis of 2007-2008, so risk aversion was definitely in excess supply.
Before moving on, it’s probably best to differentiate a full-blown bear market from a correction at this point.
And quite naturally, a correction is, therefore, a downturn that does not meet the three elements listed above. Let’s look at two examples, shall we?
That there is still the monthly chart for the S&P 500, but we’re now looking at the bull market that developed after the bear market of 2007-2009. And as y’all can see, I have marked two obvious examples.
The first example peaked in April 2010 and reached its low point in July 2010, during which time the index lost about 16.7%. So the price fell for more than two months, but the loss never reached more than 20%, which clearly makes this a correction.
As for the second example, the downturn lasted much longer, peaking in May 2011 and reaching its lowest point in October 2011, with losses amounting to around 21.3%. However, the third element was not met. But first, a little background.
Poor risk sentiment during this period was being fueled by many events, with the U.S. debt ceiling problem, Japan’s journey into recession territory, and the Greek debt crisis, which is different but related to another Greek debt crisis.
However, commitment (and action) by global central banks to help their respective economies along eventually allows risk sentiment to improve, so the third element was not met and price began moving back up.
Now that we have a better grasp of what a bear market is…
Are Global Equities in a Bear Market?
Focusing on global equities, here is a monthly chart showing the price action of several major stock indices.
I’ve also included a table that shows you the maximum peak-to-trough loss and current losses as of February 2, 2016.
As y’all can see, most equity indices peaked between March to May of last year and have been grinding lower until now, with many indices printing maximum peak-to-trough losses that are well over the 20% mark. U.S. equity indices are still fighting back, however, and most of the equity indices are currently off their lows.
As for what’s sustaining the poor risk sentiment, we probably have China’s slowing economy and slumping oil prices to blame for that.
All you have to do is look at Pip Diddy’s daily forex recaps for the past couple of weeks to see that China and oil are always being mentioned and then blamed for the prevalence of risk aversion.
To summarize, I think we are beginning to see signs of a bear market (if we are not in one already). And unless we see really good news from China, as well as solid efforts to curb oil production, this bear market will likely dig an even deeper hole.
I would also like to note that if most of the global equity markets close below the 20% mark by the end of February, we’ll probably be seeing more news reports exploring the possibility of a bear market or admitting outright that we are in one.
But for now, media outlets and even the big players are either avoiding talking about the possibility that we are in a bear market or saying that we aren’t in a bear market just yet.
Bloomberg, for example, recently released a write-up about what Citigroup has to say, which is that we’re currently in a correction. And they based their conclusion on that there list of global bear market indicators, of which only a few have been triggered so far.
But on the flip side, some institutions like the Royal Bank of Scotland are telling their clients to “Sell everything except high-quality bonds” because 2016 is supposedly gonna be a “cataclysmic year”.
What do you think? Are we in a bear market or are we in a correction? Do you have your own definition of what a bear market is?