Opinion: The stock market bulls have a new story to sell you. Don’t believe them – they’re just in the ‘bargaining’ stage of grief

Could the bear market losses at recent lows have gotten so bad that that is actually good news?

Some of the eager stock bulls I follow are driving this complex rationale. The point of their argument is that when things go bad, the good times must come.

But their argument tells us more about market sentiment than its outlook.

At the market’s recent close low, the S&P 500
+ 1.19%

fell 25% below its peak in early January. According to one version of this “too bad-it-good” argument, the stock market has in the past been a good buy whenever a bear market dropped to that threshold. After previous occasions, they assume that the market is almost always higher in a year.

This is not an argument you would normally expect to see if the recent lows represent the final low of the bear market. On the contrary, it fits perfectly with a third of the five-stage progression of bear market grief, about what I wrote before: denial, anger, bargaining, boredom and acceptance.

With their argument, the bulls are trying to convince themselves that they can survive a bear market, rationalizing that the market will be higher in a year’s time. Like Swiss-American psychiatrist Elisabeth Kübler-Ross put it when creating this five-stage plan, the main feature of the negotiation phase is that it is a safeguard against feelings of pain. It’s a far cry from the depression and eventual acceptance that often comes later in a bear market.

While not all bear markets progress through these five stages, most do as i wrote before. Odds are we have two more stages to go through. That said, the market rally of the past few weeks does not represent the beginning of a new bull market.

Numbers don’t add up

Further support for this bearish assessment comes from the finding that the bulls’ argument is Not historically supported. Only in relatively recent decades have markets reliably been higher for the one-year period following bear markets that hit the painful 25% threshold. It is not a good sign that the bulls are basing their optimism on such a fragile foundation.

Consider what I found analyzing 21 bear markets since 1900 in the Ned Davis Research calendar, where the Dow Jones Industrial Average
+ 1.34%

at least 25% off. I measured the market’s one-year return after the day each of these 21 bear markets first dropped to that loss threshold. In seven of the 21 cases, or 33%, the market was lower for a year.

It’s the same percentage that applies to all stock market days over the past century, regardless of whether those days come in a bull or bear market. So, based on how much bear market losses have been so far, there is no reason to believe that the current market rally rate is higher than at any point in time.

This is not to say that there are no valid arguments as to why the market might go up. But the concept of 25% -loss is not one of them.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at [email protected].


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