Bear Trend?

13 March 2020 By PDSNET

I saw my first bear trend in 1969 – I was 16 years old and still at school. I did not really understand what was happening – but it made a deep impression on me. Since then I have studied all the major bear trends going back to the 1907 bear market.

I did this because I believe that the only intelligent way to predict the future is to study the past. Consider: the only reason you know that the sun is going to rise tomorrow is because you have seen it happen before. If you had not seen that, you would not know.

All the bear trends that I have studied were based on human economics. In very simple terms, when the economy is booming, people are borrowing money on an excessive basis and spending it. This leads to an economic boom, the anticipation of which predicates a disproportionate rise in share prices. The rise in share prices then creates additional significant wealth resulting in an upward spiral.

Sooner or later, usually because economic booms inevitably lead to inflation, the government is forced to step in and slow the boom down – usually by increasing interest rates. This forces people to repay some or all of what they borrowed and so the level of spending in the economy slows down dramatically causing businesses to make less profits, and retrench workers. That, in turn, results in falling share prices and a general reduction in wealth – a downward spiral.

From a technical perspective, once the market has collapsed, it goes through a period of “backing and filling” while investor confidence is rebuilt and then gradually begins to rise, ultimately reaching and exceeding the highs from which the bear trend began.

So, this boom-bust cycle is based on periods of borrowing (from the future), followed by periods of repayment. At least that is how it was until Alan Greenspan, as the newly-appointed Governor of the Federal Reserve Bank who following the teachings of the economist John Maynard Keynes, injected funds into the US economy to compensate for the destruction of wealth in the 1987 crash.

Since the huge and precedented success of Greenspan’s monetary intervention, all bear trends have been handled in the same way right up to and including the 2008 sub-prime crisis.

But the sell-off in shares over the past three weeks has been caused by a completely different force – a world-wide pandemic. It is certainly true that share markets of the world were “ripe for a correction” at the time when the corona pandemic hit, but the collapse of world markets, with the S&P down 26%, has now gone too far to be considered a mere correction (and we apologise for leading you to believe that it would be in previous articles).

But I also do not consider this to be a normal bear trend – mainly because it is not rooted in the usual cycle of excessive borrowing followed by a period of repayment. It’s source is what N. N. Taleb called a “black swan” event – which by its very nature was completely unpredictable. And for that reason, we cannot expect this bear trend to behave like the bear trends of the past. Rather, it seems to me, it will follow the pattern of the virus itself – which is also still difficult to ascertain.

There are, however, some things we can say with a fair degree of certainty:

  1. Firstly, investors will almost certainly over-react to what is happening. I believe that there is a probability that they already are. So, this means that the markets will and are falling further and faster than the economic impact of the virus warrants – leading to a buying opportunity.
  2. I expect that the markets will follow the perceived progress of the virus itself - and that can best be measured at this time by what has happened and is happening in China. The Chinese have been dealing with the pandemic from about November last year and their infection and mortality rates are now dropping sharply. They are busy sending people back to work in a desperate effort to get their economy moving again. This means that the virus probably has a life of about 4 or 5 months – at least as far as its economic impact is concerned.
  3. It seems reasonable to assume that the countries, like Italy, which are currently experiencing very high infection and mortality rates will be in a recovery and “back-to-work” stage in two or three months’ time at the latest. The rest of the world has the considerable advantage of learning from the experiences of China and other countries where the virus initially ran out of control.
  4. And, of course, Africa, although much slower to become infected, is likely to be hardest hit, because of its poverty, its existing disease load (in South Africa we have 8 million people with AIDS) and its lack of organisational ability and medical infrastructure.
  5. In the background, there are drugs and vaccines which are currently being tested and which should have an impact on the spread of the virus before the end of this year – which may well come to the rescue of Africa.

For these reasons, this bear trend is likely to be relatively short and sharp. Investors will begin to see that the virus has or is running its course in first world countries and, at some point in the next few months, they will re-enter the market as aggressive bargain-hunters. So, my expectation is that we will see a “V-bottom” in the chart with a relatively short period of “backing and filling” before a new upward trend commences. And I expect that upward trend to be much more rapid than the usual recovery phase.

So, this bear trend is not comparable to previous bear trends (which usually last at least two to three years) and cannot be assessed on the same basis. It is unique in the history of bear trends because it has not been caused by excessive borrowing and spending. And, finally, it should be shorter and sharper than previous bear trends for the same reasons.

Of course, bear trends, like wild fires, can create their own momentum and now that the S&P500 is firmly in a bear trend, we can expect its movements to be exaggerated as investors as a group vacillate between the extremes of optimism and pessimism.

 

An Article by Jack Milne  

 


DISCLAIMER

All information and data contained within the PDSnet Articles is for informational purposes only. PDSnet makes no representations as to the accuracy, completeness, suitability, or validity, of any information, and shall not be liable for any errors, omissions, or any losses, injuries, or damages arising from its display or use. Information in the PDSnet Articles are based on the author’s opinion and experience and should not be considered professional financial investment advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Thoughts and opinions will also change from time to time as more information is accumulated. PDSnet reserves the right to delete any comment or opinion for any reason.



Share this article:

PDSNET ARTICLES

The Confidential Report - December 2020

We have come to the end of a tumultuous and unique year marked by the “black swan” event of COVID-19, various Trump excesses and, finally, his vanquishing. The long-term progress of the S&P500 as outlined in “our Background Approach” on our web site remains in tact. In that scenario, the world economy is moving into a strong boom phase stimulated by unprecedented

Hyprop

Property shares on the JSE have had a torrid time over the last few years. It began with the melt-down which resulted from the Resilient crisis, now substantially behind us, and continued with the eventual failure of the Edcon Group and the effects of the COVID-19 lockdown. These events have combined with a generally negative economy to reduce the value of property shares significantly.
Hyprop

Market Overview

Now that the uncertainty of the US election is essentially over, it is perhaps a good time to step back and consider where we are and what is likely to happen next.

The S&P500 index, which is an excellent benchmark for trends in the international markets, appears to be breaking to a new record high – above the resistance at 3580. Consider the chart:

Insider Trading

The JSE has just witnessed one of the most blatant examples of insider trading in many decades. It involved a small real estate investment trust (REIT) called Texton. This company owns 53 properties, 56% of which are in South Africa and the balance in the UK. After it listed on the JSE in August 2011, the share rose to a high of 1235c on 6th March 2015 before beginning a steady

The Confidential Report - November 2020

America
At the close of trade on Friday (30-10-20), the S&P500 index was down 7,5% from its cycle high of 3534 made on the 12th October 2020 – and this puts the market on a knife-edge. Consider the chart:

The critical level from a technical perspective is the previous cycle low of

EOH

Enterprise Outsourcing Holdings (EOH) offers the private investor a very instructive example of a quality share that gave a clear signal of its impending troubles. It shows that, just because a share is an institutional favourite, does not mean that it is immune to the vagaries of the market. Any share can fall on hard times – and the secret is to watch the technical signals as

Balwin

The JSE property index (J253) has fallen over 68% since December 2018, firstly because of the adverse report about the Resilience group in January 2018 and then because of the pandemic in March 2020. This has left the index trading at a fraction of its underlying value – which represents an opportunity for private investors.
Among the property shares there are some which we believe represent bargains,

The Great Bull

We have often stressed the importance of understanding the long-term context within which the share market is moving. It is very difficult to see what is likely to happen in the future unless you go back in history and study how we arrived at this point. In this context, it is important to understand that, these days, the major markets of the world generally move together – and they all follow Wall Street.

The Confidential Report - October 2020

America
Technically, September 2020 was a correction month on Wall Street, with the S&P500 falling about 9,3%. The market was certainly due for some sort of correction following its record high of 3580 on 2nd September. Consider the chart:

You can see here that over the past month the S&P

The Relationship between Fundamental and Technical Analysis

There are generally two approaches to share assessment – fundamental and technical analysis. The fundamentalist is trying to answer the question, “How good will the company be as a generator of dividends in the future?” while the technician is looking for patterns in the share’s price and volume charts to improve his predictions of where the share