Strength of the Bear

Stocks lost ground once again last week and sentiment has changed for many investors. The Dow Jones Industrial Average (DJIA) resumed its weekly Friday decline after a one week hiatus and following its second-best day in history. Bond prices were mixed and volume was active.

Futures prices began to sell off following the Unemployment Situation Report, which showed that 86,000 jobs were eliminated year to year and that average hourly earnings figures remained strong. This re-ignited fear that a slowing U.S. economy would continue to impact corporate earnings, even at these low levels. Companies continued to warn that corporate results would be lower and that more employees face the ax.

Market benchmarks and individual stocks continue to decline, even with most of their respective indicators in negative territory. Prices continue their descent despite the fact that they are undervalued. When the shares do rise, they tend to fall harder as both original and new sellers compete to sell.

Over the past several weeks we have seen evidence of some strength returning to the markets. However, these rallies have failed, and in many cases, the benchmarks have set lower highs. These failures are characteristic of the general weakness of the markets that has been fueled by skepticism and lack of conviction. It appears that only the short-term traders are willing to bet on the rallies, seeking to make quick profits on oversold bounces. Long-term investors do not believe that it is time to dive back into the markets with both feet, while some investors who missed selling opportunities have taken advantage of short-term price increases to sell some positions. Thus the production of failing rallies and lower highs, as illustrated below.

COMPARING TO 1994
The last "Bear Market," which occurred in 1994, was much different than the current market. Seven years ago, stocks declined in a group rotation basis. Back then, each industry group suffered through its own bear market. When the market finished beating one sector down, another group was taken out back for its beating while the preceding group began the healing process. As a result, the major market benchmarks generally trended sideways for the year, in what was later termed "The Stealth Bear Market of '94." During that period, market indices never confirmed the bear move by dropping 20% from the highs, instead, volume dropped and volatility levels were low. This was a more passive or friendly bear market, indicating that the economic cycle was still intact with periods of slowing without recession, thus the friendliness of the Bear.

Figure I - The Dow Jones Industrial Average (DJIA), S&P 500 Index (SPX), and NASDAQ Composite Index (COMPQ) Daily Charts for calendar year 1994.

As we near what is hopefully the end of the 2000-2001 Bear Market, we note the differences from the last slowdown. This Bear has a meaner growl and a more substantial bite. There has not been a rotation, keeping investors' spirits from turning negative. This "Millennium Bear" has put its teeth out and bitten nearly every investor that has crossed its paths. It has forecast an economic recession and has eaten many baby businesses, especially those in the Internet group. Ita mark has been left on investors, and has educated the young on the damage that a Bear can inflict.

Figure II - The Dow Jones Industrial Average (DJIA), S&P 500 Index (SPX), and NASDAQ Composite Index (COMPQ) Daily Charts - March 2000 to April 6, 2001.

TIME TO LOOK FORWARD
Do not be fooled. Most people were caught by surprise and in a vulnerable position when the Bear arrived at camp. Investors, traders, analysts, economists, and market experts have all been victims. Now is the time to look to the future and use the past as an educational experience. Do not let the Bear get the best of you. It is time to educate yourself with new tools, strategies, and discipline that will allow you to make money while reducing your risk exposure.

On April 23 and 24, Ivolatility, in conjunction with Scott "The-Strategist" Fullman will present an online webcast that helps to define volatility, what it means, and how to use it. Sign up for this course, which can be seen at your home or office, at www.ivolatility.com. The most important lesson of a Bear market is learning how to avoid substantial losses before the Bear returns.