Calling a Bear a Bear

by Randall Forsyth Friday, June 11, 2010

Claiming the stock market is merely correcting looks like an error.

The sort of market that dare not speak its name -- bear -- is being mentioned increasingly in polite company.

It's been a few weeks since this column asserted the trend had turned lower. If anything, even though stocks snapped a 3-week losing streak on Friday and the Dow is out of correction territory for now, the tide still is moving in that direction.

While the major stock averages aren't down the requisite 20% that conventionally defines a bear market, the odds of the current decline stopping short of that mark aren't great.

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According to Bespoke Investment Group, there have been 58 "corrections" of 10% or more in the Standard & Poor's 500 since 1927. In 33 cases, the corrections stopped short of the 20% bear market threshold and the market went on to higher highs, while 25 times they grew into a full-grown grizzly.

But in the 32 instances when the market has dropped as much as this one has the outcome has been heavily weighted to the losing side. Only seven times drops of that size stopped short of the 20% bear mark. In the 25 other times the decline extended to 20%, the average bear market decline was 35.5%.

As pointed out in that aforementioned column from last month, Dow Theory Letters' Richard Russell was unequivocal in urging his subscribers to get out of stocks. And in his latest Remarks, the dean of market technicians is even more adamant. After listing a litany of bearish technical indicators, he concludes;

"So all in all, I'm convinced through many of my studies that the top has been put in and the primary bear trend is again in force. Remember, the 14-month counter-trend advance served to hold back the bear forces, even though the bear pressure had been building up. For this reason, I'm afraid of what might occur in the weeks and months ahead. This, even though I believe a tame period is overdue."

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