If It Looks Like Bear, and Acts Like A Bear...

December 16, 2018

Mish's Daily

By Geoff Bysshe

blankThe commonly excepted definition of a bear market is misleading and dangerous.

“Bear Market” implies it’s dangerous to buy stocks, but based on the commonly excepted definition of a bear market, the Dow, S&P 500 and Nasdaq 100 indexes aren’t there yet.

If you’re a regular reader of Mish’s commentary, this shouldn’t come as any surprise...

Stocks are in a bear market now, and you should trade accordingly.

At MarketGauge we call a Bear Market a Bearish Market Phase.

Currently, major media outlets describe markets as in a “correction”. This is their definition of a market that is down at least 10%. A bear market is declared when the decline reaches 20%.

I agree that the market is in a correction. However, the danger in the media’s categorization is that not all 10% declines occur with the same level of risks of immediate future declines.

Looking at the SPY in 2018 as an example, the 10% correction levels reached in February and April were not as dangerous or bearish as the 10% correction levels the SPY sits at now.

The short answer is that the 10% declines at the beginning of this year landed on the 200-day moving average which had a bullish positive slope.

In MarketGauge’s terms, a market under the 50-day moving average, and over the 200-day moving average is in a Warning Phase.

On the other hand, the October 10% correction in the SPY had it sitting well under its 200-day moving average.

In MarketGauge’s terms, a market with the 50-day moving average over the 200-day, and the price under the 200-day moving average is in a Distribution Phase.

A 10% correction into a Distribution Phase is more bearish, and dangerous to shareholders than a 10% correction into a Warning Phase.

For this reason, you should be more cautious and discerning about taking long position during a 10% correction that is in a Distribution Phase than during a 10% correction that is in a Warning Phase.

Likewise, it’s not surprising that the current 10% correction is having a more difficult time rallying than the 10% correction earlier this year.

In the image below, you can see the progression of the Market Phases illustrated.


As you can see in the image above, the Bearish Phase follows the Distribution Phase in the negative progression of a market's trend.

As you’d expect by its name, this is even more dangerous to shareholders. It’s more dangerous because in this phase the trend is firmly down.

In a Bearish Phase, rallies are likely to roll over, declines have a high risk of growing into big down days, and weak stocks get weaker.

As it has turned out, the SPY entered a Bearish Phase in early December when its 50-day moving average moved below its 200-day moving average.

This change to the Bearish Phase came at a time when the correction was still about 10% from the all-time high.

The QQQ also moved into a Bearish Phase, and the IWM has been in a Bearish Phase since mid-November.  The DIA is in a very weak Distribution Phase.

As the market moved lower on Friday, you were probably focused on the fact that the DIA, SPY, and QQQ are all trying to hold above their recent correction lows while the IWM has already moved lower.

Given that 3 of the 4 indexes are in Bearish Phases, these are very dangerous lows to bet on holding.

In fact, on a closing basis, the DIA and SPY and IWM all closed at new lows for this correction.

If the market continues lower next week, stocks at new lows are not likely to be a good buying opportunity.

However, Bear Phases are not all bad!

First, there are strategies and tactics for profiting from down trends with short selling trades, put options, reverse ETFs and more.

Second, there are tactics for buying stocks that are down and in Bearish Phases, but if you’re not familiar with these strategies and tactics.

Third, Bearish Phases set up great opportunities for bullish trades in the future.

Most importantly, the first step to succeeding in a bear market is being able to recognize one and adjust your trading accordingly!

Yes, we’re in a market correction, but we’re also a bear market!

Be careful, trade with a plan and stay disciplined!

If you’d like to learn more about how Mish (and the rest of us at MarketGauge) use Market Phases, click here for free training to identify trades in all market conditions.

S&P 500 (SPY) 269.40 is the number this must clear to improve outlook. Friday was a new closing low for the correction. Noteworthy, 259.85 is Friday’s low and the low from October. The low of the recent correction is 258.62.

Russell 2000 (IWM) 147.50 is the number we need to clear to change our short-term perspective to bullish. Friday’s break below 142 suggests 134 may be likely.

Dow (DIA) 233.20 is important support and the 2018 low made in April. And a close under 240.50 would make that more likely.  A close over 252 would be bullish.

Nasdaq (QQQ) Held the critical 160 level. Still needs to clear back over 168 to get positive for a mini to swing trade.

KRE (Regional Banks) This sector is in deep trouble and I would not touch it

SMH (Semiconductors) 86.95 recent low is key support on weekly charts and weekly pattern is looking ominous as a bear flag broke down on Friday..

IYT (Transportation) New low close for the year and support is much lower.

IBB (Biotechnology) 104.75-105 resistance with 100.50-102 as major support. Currently only member of modern family with positive volume patterns and relative strength, but it better hold 100 or watch out.

XRT (Retail) Broking down on a daily and weekly basis.

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