"Classic Bear Signal"
Front page story in today's WSJ:
In many ways, this is what a classic bear market looks like: After a long period of exuberance, a downturn hits one part of the economy -- in this case, the housing market and mortgage-backed securities. Eventually, that leads to broader losses, even for strong companies, and markets begin a prolonged grind downward. . .
The current market looks a lot like the beginning of past bear markets, such as the ones that began in 2000 and in the 1970s and 1987, said Paul Desmond, president of market-research firm Lowry's Reports in North Palm Beach, Fla. First, the most troubled stocks decline -- home builders and financial stocks in the current case -- and then others gradually get hit, including small stocks, retailers, technology stocks, and foreign stocks. Finally even stocks of strong companies are affected.
What happens, Mr. Desmond says, is that trading volume and price movement get heavier and heavier for stocks that are declining, and lighter and lighter on the buying side, as more investors look for a way out. When the selling reaches a climax, the bear market is nearing an end, but Mr. Desmond says he doesn't see any sign of a climax yet.
"We feel we have been in a bear market since July. Everything that we have seen since then has just been a progression, almost like a disease that you are monitoring and the disease is spreading," he says. "We are still a long way from a major bottom."
He is watching for a sign of panic selling, but says it hasn't gotten to that point yet. "Everything we are seeing looks like a typical bear market," he says."
Our interview with Paul Desmond a few years ago on the subject of Market Tops was quite instructive. Note that Paul has been appropriately Bullish the entire run up, and only became cautious last summer.
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Previously:
Q&A: Paul Desmond of Lowry's Reports http://bigpicture.typepad.com/comments/2006/02/qa_paul_desmond.html
Part II -- Q&A: Paul Desmond of Lowry's Reports http://bigpicture.typepad.com/comments/2006/02/part_ii_qa_paul.html
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Source:
Stocks Show Classic Bear Signals, And This Time, Impact Is Global
E.S. BROWNING and JOANNA SLATER
WSJ, January 23, 2008
http://online.wsj.com/article/SB120104941530008299.html
Wednesday, January 23, 2008 | 04:00 AM | Permalink
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Comments
A panic selling is exactly what Mr Bernanke and the PPT have desperately attempted to prevent yesterday.
One would better understand Mr Bernanke philosophy after reading his "Great Moderation" paper:
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2004/20040220/default.htm#f4
It seems that by deliberately trying to contain the volatility of output, Mr Bernanke is opening wide the pandora box of inflation volatility. Additionally, Mr Bernanke it making the huge bet that monetary policy works in today's context. In that sense, he is as reckless as his predecessor, but may proved to be much less lucky.
Posted by: Steelduck | Jan 23, 2008 4:20:25 AM
P.S. regarding my previous post above: I apologize for the spelling/grammar mistakes; I'm french. Nobody's perfect...
Posted by: Steelduck | Jan 23, 2008 4:51:01 AM
Steelduck, you're completely forgiven, and actually you didn't do badly at all. In business, I've known a lot of Americans who do worse with their English.
And Barry...WTF? You're up reading the Journal at 4 a.m.? I'm impressed. I had to pull an all-nighter to meet a tight deadline, but you're an animal. You're serious, dude.
Posted by: dark1p | Jan 23, 2008 5:11:54 AM
Steelduck, no need to apologize! Did I spell that right? lol Great info, thanks.
The financial gurus on tv, telling people to buy, at these bargain prices, must not be able to see the forest through the trees. This market is going to get a lot, lot worse. Mostly because of the FED by trying to make this tree grow to the sky, instead of letting "financial nature" prune it, has created dead wood!
Posted by: Justin | Jan 23, 2008 6:03:32 AM
I get a funny feeling that greenspan/bernanke, being the scientist that they are, have been using the U.S. economy as an experiment. EXPERIMENT FAILED!
Posted by: Justin | Jan 23, 2008 6:14:32 AM
i thought he was also bearish in the summer , after the correction in 2006 ??
anyone ??
Posted by: rickrude | Jan 23, 2008 6:58:09 AM
Following Mr. Desmond's logic, the Fed has little to worry about on the long term inflation front. It looks to me that the Fed has chosen the course of stagflation as the lesser of two evils between a collapse in asset prices versus degrading the currency. Supply side economics is always about destroying savings and that is what they have done.
Way back in the day, a recession, by definition, was a necessary requirement to reduce inflation. The synthetic economy of 2000-2008 economy has been an exercise in inflationary stimulation by the post glass-steagal investment banks and the republican government. Excessive money growth has been achieved by harvesting the excess borrowing capacity of the Clinton balanced budget economy with a huge portion of Keynsian spending thrown in to make it look like supply side tax cuts actually work. We played this music in the raygun 80's.
Now that excess debt capacity has been consumed, the operating leverage of the public and private economies is way past maximum. Continued Keynsian spending can increase the public debt but the risks of a systemic crash are increasing asymptotically.
Cash flow has been based on debt proceeds rather than productivity. Now that we are fully leveraged, the debt bubble is collapsing. Equity prices, like all assets, are inflated. The valuation is based on capital gains expectations rather than internal cash flow and growth in dividends. That concept is reversing. Dividend stability and growth is likely to be king. The 20 year bubble in P/E ratio will reverse at the same time as E growth moderates.
I guess a bear market is a possibility.
Posted by: blam | Jan 23, 2008 7:01:53 AM
How many bear markets does Desmond have to call before he gets one right? Didn't he call for one back in December, 2006 too?
Folks, financials have been in a bear market for over 8 months now; transports have been there for 4 months now; retail 2 months.
You can't define a bear market by a 20% drop from the highs; by then it is too late.
There are better ways...
Posted by: Guy M. Lerner | Jan 23, 2008 9:51:09 AM
blam,
Very nice summary.
Posted by: Al Czervik | Jan 23, 2008 12:09:46 PM
Guy,
you've got to be kidding...picking on Paul Desmond? Truth is there are many ways that work for many people. I'm familiar with your methods from your days on RealMoney...sorry to say, but they didn't work for me. Paul on the other hand is a trusted advisor who I find has a great handle on the market cycles over the intermediate/longterm periods. just my perspective
Posted by: glenn_in_MA | Jan 23, 2008 12:19:37 PM
I don't know about "classic bear signal" but I do agree this looks like the beginning stages of a bear market. It would have been nice for "helicopter" Ben to allow the washout that begin monday to run its course. An '87 type flush is preferrable to a long grinding bear market.
Posted by: red95king | Jan 23, 2008 12:29:24 PM
Okay - here goes my toe dipping into this pool.
I'm not much of an investor compared to most that comment here, but...
I took my meager 401K out of equities and into the bond market in July 2007. I'll jump back into equities (probably) around October 2008 - depending on circumstances (market, politics, whether the recession has actually bottomed out).
Compared to some of the commenters I've seen, I can now consider myself a friggin' genius.
People who live in glass houses, et.al.
Posted by: Blue Steel | Jan 23, 2008 2:00:51 PM
How many bear markets does Desmond have to call before he gets one right? Didn't he call for one back in December, 2006 too?
Folks, financials have been in a bear market for over 8 months now; transports have been there for 4 months now; retail 2 months.
You can't define a bear market by a 20% drop from the highs; by then it is too late.
There are better ways...
Posted by: Guy M. Lerner | Jan 23, 2008 9:51:09 AM
/////////////////////////////
he called one in summer of 2006, then the winter of 2005 or somewhere along that time frame.
The more he calls it, the less statistical significance can be attributed to his genius
Posted by: rickrude | Jan 23, 2008 5:30:11 PM
