As a follow on to yesterday's post re the equity market's topping process ("Set Up Time"), let's look at what happens when the Mega Trend bear signal is made and the stock market action that tends to ensue.

The two charts below show the S&P 500 at the start of the two most recent bears (2008 and 2001) when the Mega Trend* bear signal (red arrow) was generated. Note the somewhat less than dramatic fall as stocks tend to erode at first more than collapse. There are many understandable reasons for this most notably the disbelief that the bear has arrived as many investors cling to the still relatively good economy and earnings data (not to mention the Ouija board status such work tends to receive from the fundamental analysis-only crowd).

So, erosion becomes the state of affairs until all hell breaks loose via a full blown panic plunge. Interestingly, the feedback loop (or negative wealth effect, if you wish) to the real economy (and earnings) may be a contributing factor to the ensuing full blown plunge in stocks but I know of no studies that verify that statement, as logical as it seems.

In sum: as we sit in a potential set up/market topping phase, it's good to anticipate (but not act) on what may yet occur.

*see prior posts.