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There has been some debate here recently on the issue of whether we are
in a bear market. Generally, when applying percentages, a 10% decline
has been viewed as a correction and a 20% decline has been viewed as a
bear market. However, I thought it might be instructive to refer to the
venerable Edwards and McGee for some guidance on the subject without
digging into Dow Theory and other abstractions. When it comes to bull
and bear markets, E&M refers exclusively to the Primary Trend of the
market.
"The "market", meaning the price of stocks in general, swings in trends,
of which the most important are its Major or Primary Trends. These are
the extensive up or down movements which usually last for a year or more
and result in general appreciation or depreciation in value of more than
20%." The only problem with applying the 20% requirement in evaluating
major swings is that we haven't had a 20% correction in the major
indexes since 1987.
However E&M goes on to deal with the importance of swings in defining
bull and bear markets:
"As long as each successive rally (price advance) reaches a higher level
than the one before it, and each secondary reaction stops (i.e., the
price trend reverses from down to up) at a higher level than the
previous reaction, the Primary Trend is Up. This is called a Bull
Market. Conversely, when each intermediate decline carries prices to a
successively lower levels and each intervening rally fails to bring them
back up to the top level of the preceding rally, the Primary Trend is
Down, and that is called a Bear Market. (The terms bull and bear are
frequently used loosely with references, respectively, to any sort of up
or down movements, but we shall use them in this book only in connection
with the Major or Primary movements of the market in the Dow sense.)"
We run into a major problem in combining the 20% advance/decline with
higher/lower pivots. The only 20% swing since the 1987 lows has been up!
Because of the unusual situation where no 20% correction has occurred in
such a long period of time and it is beyond the test of reason to
require taking out the 1987 lows to define a bear market, it seems more
reasonable to apply the swing test to the primary trend.
The attached weekly closing GIF of the DJIA, with labeled "P"rimary and
"I"ntermediate pivots, shows that the most recent major pivot high (not
yet labeled with a "P" because not enough bars have elapsed) was a
higher high so this does not qualify even though the most recent pivot
low (which may qualify at best as "I"ntermediate) has been taken out.
The attached weekly closing GIF of the NYSE (2 of 2) is on the cusp of
showing a true bear market according to the E&M definition. Note that
the most recent (unlabeled) primary pivot was lower than the previous
"P"rimary pivot and last week's close was only 0.25 above the previous
"P"rimary pivot low. Thus any weekly move to new closing lows would
effectively meet the test of low Primary high and lower Primary low.
Should the NYSE composite close below 576.17, I would consider it to be
in a bear market.
Earl
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