DDD (#3): Bear Market Knowledge & Extremely (Good?) Fear

A quick fix of the latest financial happenings.

Carter Kilmann

Jun 17, 2022

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Without further ado…

One Stat About Bear Markets to Keep in Mind

On Monday, we officially entered a bear market, as the S&P dropped below the arbitrary 20% threshold. It’s certainly not the first bear market of the century — it’s not even the first of the decade (although the pandemic downturn was the shortest on record, it was still a bear).

In light of this new bear, here’s a stat to keep in mind as we anxiously wait for the bulls to come home:

The typical bear market takes 3.1 years to completely recover, dating back to 1929.

But, in terms of length, every bear market is different.

The COVID-19 bear took 6 months to recover.

The housing market crash took 5.5 years to recover.

The dot-com bubble burst took 7.2 years to recover.

As the adage goes, past performance is no guarantee of future results — but the key takeaway is that we may be in rough waters for a considerable amount of time.

Or maybe we won’t be?

Two Words of Encouraging Market Sentiment: Extreme Fear

A bear market typically doesn’t inspire much confidence. According to CNN’s Fear & Greed Index, which is a compilation of seven technical indicators like the 125-day moving average of the S&P 500 and the 5-day average put-to-call ratio, stock investors are extremely fearful.

The digital currency market isn’t any calmer. The Crypto Fear & Greed Index, which is also based on several technical indicators, reads quite similarly:

Neither reading is much of a surprise considering rampant inflation, expected rate hikes, looming layoffs, and the threat of a long-lived recession. However, contrary to what these readings suggest, this level of fear could be good news.

Here’s an excerpt from a recent Barron’s post that suggests we may be headed toward greener pastures. (Emboldened for emphasis)

The market’s decline has landed an unusually large number of stocks below their 50-day moving averages. That’s a longer trend, so when a stock falls below it, that signals weakening investor confidence. Only 4.6% of S&P 500 stocks are trading above their 50-day moving averages, according to Dow Jones Market data. That’s the lowest since April 1, 2020, the early days of Covid-19 lockdowns.
When fewer than 5% of the index’s stocks are above their 50-day moving averages, the index goes on to gain 23% for the following year on average dating back to 1990, according to Truist. And however large the gains are, the index rises every time.