Thursday, January 8, 2009


Primary Bear Market

Stage 1. Distribution

Just as accumulation is the hallmark of the first stage of a primary bull market, distribution marks the beginning of a bear market. As the "smart money" begins to realise that business conditions are not quite as good as once thought, and thus they begin to sell stock. There is little in the headlines to indicate a bear market is at hand and general business conditions remain good. However stocks begin to lose their lustre and the decline begins to take hand. After a moderate decline, there is a reaction rally that retraces a portion of the decline. Hamilton noted that reaction rallies during a bear market were quite swift and sharp . This quick and sudden movement would invigorate the bulls to proclaim the bull market alive and well. However the reaction high of the secondary move would form and be lower than the previous high. After making a lower high, a break below the previous low, would confirm that this was the second stage of a bear market.

Stage 2. Movement With Strength

As with the primary bull market stage two of a primary bear market provides the largest move. This is when the trend has been identified as down and business conditions begin to deteriorate. Earnings estimates are reduced, shortfalls occur, profit margins shrink and revenues fall.

Stage 3. Despair

At the final stage of a bear market all hope is lost and stocks are frowned upon. Valuations are low, but the selling continues as participants seek to sell no matter what. The news from corporate America is bad, the economic outlook is bleak and no buyers are to be found. The market will continue to decline until all the bad news is fully priced into the stocks. Once stocks fully reflect the worst possible outcome, the cycle begins again.


NYC Trader said...

Stewie- Every DIETF charts I look, they look horrible!

Stewie said...

whats DIETF?

Anonymous said...


what stage do you think we are in?

Stewie said...

Szman: i'd avoid these double etfs right now. volume drying up and indexes churning higher.

phanta: i am not smart enough to know which phase we are in BUT if i had to take a guess, i'd say we are somewhere in phase 3. you can feel right now that average joe is starting to get disgusted with stocks. why would anyone trust stocks and the stock market right now? a little while longer and maybe a little more pain.

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