Saturday August 14, 2010
The bear market of 2011-2012 is underway in the same fashion that the bear market of 2008 began in 2007. The smaller cap stocks will decline before the larger stocks. The relative calm behavior of the larger stocks distracts most of the crowd, like the anchors on CNBC from what is really happening.
This is a performance chart. The purpose is to show the performance of one index relative to another. The chart shows that the S & P Small Cap and the Russell 2000 small stock index have had much larger percentage fluctuations than the other two. Next in order is the NASD Composite in blue. It contains large caps like MSFT and APPL as well las traditional smaller stocks. And so its performance sandwiches between the two. The DOW Industrials has the largest percentage of large capitalization stocks of the group. Hence its volatility is the least. These will be the last stocks sold in a bear market.
The performance chart is showing that the small caps are already down some 20%. Most of the market is focused on the GM IPO, how Apple will handle the challenge of the Google Android, and other distractions. Make no mistake, the bear market resumed in April, 2010 and is now underway. The summer months have done their usual job of distracting by convincing most folks there is nothing to worry about. Note that the two small cap indices peaked before the Dow.
Distractions
Let's look back at 2008 to see how even the internal indicators could 'distract' one from the big picture. We are aware that our call for stocks to rally from early July upset some readers in the bear camp, but that is what happened. Look at how the summer of 2008 performed by comparison.
Indeed, precisely the same thing happened! Stocks hit a low in July at 25 BP and then rallied, no doubt convincingly to many at the time, to over 50%. But after Labor Day the entire picture fell apart. Note that the vertical axis is extended to near zero for the Fall Collapse.
This is the same chart through today two years later. Again stocks collapsed into the summer and arllied into August form 40 to 60%.
However the brief summer rally for 2008 ended badly that fall. The smart money rallied the stocks so that they could sell from better levels to those that did not believe the bear market was underway.
We hope the parallel is clear. The danger level is high. Wile such a large collapse does not appear probable at this point to most it did not then either. The point is that this is a much better time to be selling than buying as it was then.
Since the market sold off violently just two years ago, but more slowly in 2001-02, we would guess that a longer two year grinding bear market lies ahead. This would be more like 200-2002, 1930-32 or 1972-74. In those years there was not a crash spanning a few days or weeks. There was a grinding multi year stair step down bear market. Sharp rallies distracted participants from what was happening. Each rally brought in new buyers only to be disappointed again. The bottoms of 1932 and 1974 came with a whimper not a bang.
Here is another example of how the media distracts from the big picture. BIDU in blue provides Chinese internet service and has performed in spectacular fashion. APPL in red has had one product success after another. The RUT is underperforming other indices as previously shown. The public has crowded into junk bond funds in green. Further note the irony that JNK was originally a Lehman Fund; Lehman went under in the 2008 debacle. There are always stocks that funds will 'hide in. In other eras this would be IBM, DEC, University Computing, or in the 1990s, the Mexican Telephone Company of all things. These are distractions, the big picture is that the bear is underway.
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