Opinion: When the bear market starts, you may not know why

It was 14 years ago this week on October 9, 2007, that the stock market soared in its bull market before the start of the financial crisis-induced bear market.

I’m willing to bet that the last thing on your mind that day was whether a new bear market was starting. Instead, you were no doubt participating in the surge that was accompanied by another new bull-market height. S&P 500 SPX,
It was 120% higher than it was at the start of the bull market five years ago.

And, nevertheless, one of the worst bear markets in U.S. history began that day. The S&P 500 will be in the next 16 months Lose 55%.

Walking in this memory lane is important because it serves as a reminder that bull market peaks are not recognized in real time. As soon as it is true that it becomes clear that the bull market is over.

Many clients disagreed with me on this point, insisting that they actually got a good idea that the bull market was going to end in October 2007. But they are almost certainly rewriting history, which is understandable. It is human nature to rewrite the past so that it is clear that events will unfold as they happened.

But the start of the 2007-2009 beer market was nothing but clear at the moment.

If you have any doubts, consider the average recommended equity exposure in a subset of about 100 short-term stock market timers that my firm monitors on a daily basis. (This average is represented by the Holbert Stock Newsletter Sentiment Index, or HSNSI.) On average, the HSNSI reaches its highest level the day the bull market moves to the top.

It is illustrated in the chart with. This is the average of HSNSI between six weeks ago and six weeks at the top of every bull market for the last years0 years (according to the calendar conducted by Ned Davis Research). As you can see, the HSNSI average bull market increased by 20 percentage points in the last six weeks and then decreased by 40 percentage points in the first six weeks of the next bear market.

In other words, professional market timers are the most optimistic the day they should be the most pessimistic. They are professionals who follow the market every day, every day. If they can’t do better, do you think you can?

Market timer comment

I think these figures make an interesting case. But to add anecdotal icing to the cake, consider a representative sample of comments made by newsletter editors on the exact day of the October 200 market top, or immediately before:

  • “If you listen carefully, you can hear the roar. This disturbing thunderstorm of the third stage of this great bull market … I can see the good times are turning, I’m really doing it.”

  • “There have been days when I have felt so confident about the possibility of some great gain with our serious money. So, if you haven’t already, it’s necessary for your money [stock] Market as fast as possible. Time waits for no one, and your money is waiting for you. So go into it. ”

  • “The global bull market in stocks is not just moving, it’s entering a strong phase … Now that the Fed has flagged that interest rates are falling, there’s really nothing to hold the market back.”

  • “Here we have 16,000 Dow … [I]We see that the stock market is closed for the next to months. ” [The Dow on the day of the October 2007 bull market top was 14,165.]

  • “There is no risk of a more than 20% decline in the circular bear market on the radar screen.”

  • “The long-term bull market is intact … you have to buy for any weakness.”

Their outburst is obvious, isn’t it? And the adversity is irresistible that you felt the same way that day – no matter what story you tell yourself today.

Investment Lessons

The meaning of the investment is clear: don’t rely on being able to reduce your equity exposure to avoid a bear market.

This is why you should adopt and follow a strategy through a bear market. If you can invest 100% during the bull market until the exact day of the top of the S&P 500, it may not theoretically make the most money, and then 100% cash is transferred to the bear market for the period. But no one achieves that theoretical maximum in the real world.

The enemy of perfect good, in other words.

For the record, I have no idea if the bear market has started. It has been more than a month since the S&P 500 hit its bull market so far and is currently trading about 3% lower than that high.

But if it starts, we won’t know for sure many months from now and when the market will be completely low.

Mark Halbert is a regular contributor to MarketWatch. His Halbert rating tracks investment newsletters that pay an equivalent fee for monitoring. He can be reached at

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