If It Looks Like A Bear, And Acts Like A Bear...

The commonly accepted definition of a bear market is misleading and dangerous. “Bear Market” implies it’s dangerous to buy stocks, but based on the commonly accepted definition of a bear market, the Dow, S&P 500 and Nasdaq 100 indexes aren’t there yet.

If you’re a regular reader of Mish’s commentary, this shouldn’t come as any surprise. Stocks are in a bear market now, and you should trade accordingly. At MarketGauge we call a Bear Market a Bearish Market Phase.

Currently, major media outlets describe markets as in a “correction”. This is their definition of a market that is down at least 10%. A bear market is declared when the decline reaches 20%. I agree that the market is in a correction. However, the danger in the media’s categorization is that not all 10% declines occur with the same level of risks of immediate future declines.

Looking at the SPY in 2018 as an example, the 10% correction levels reached in February and April were not as dangerous or bearish as the 10% correction levels the SPY sits at now.

The short answer is that the 10% declines at the beginning of this year landed on the 200-day moving average which had a bullish positive slope. In MarketGauge’s terms, a market under the 50-day moving average, and over the 200-day moving average is in a Warning Phase.

On the other hand, the October 10% correction in the SPY had it sitting well under its 200-day moving average. In MarketGauge’s terms, a market with the 50-day moving average over the 200-day, and the price under the 200-day moving average is in a Distribution Phase.

A 10% correction into a Distribution Phase is more bearish, and dangerous to shareholders than a 10% correction into a Warning Phase.

For this reason, you should be more cautious and discerning about taking long positions during a 10% correction that is in a Distribution Phase than during a 10% correction that is in a Warning Phase.

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Disclosure: 

If you’d like to learn more about how Mish (and the rest of us at MarketGauge) use Market Phases, 

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