You have likely heard various analysts or reporters talking about whether we have entered bear market territory or not. The traditional demarcation point is a loss of 20 percent or more on an index with no regard for how long it takes for the decline to occur.
Personally, I like to look at the percentage loss as well as how long it takes to get there. For instance, the S&P has lost over 17 percent since its high on July 7. This is a sharp decline in only seven weeks.
To me, a bear market is like what we saw in 2000-2003 and in 2007-2009.
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These were prolonged bear markets that saw the indices lose 50 percent of their value.
This doesn’t feel like a bear market to me, because of the sharp selloff and because of the levels of pessimism.
The Rydex Nova/Ursa ratio hit its lowest reading since the fall of 2008 on Friday and the 21-day moving average on the CBOE Equity Put/Call Ratio was the highest it has been since February 2009. Both of these readings represent extreme levels of pessimism.
As a contrarian, these extreme levels of pessimism usually come at market bottoms, not in the early stages of a prolonged bear market.
If this turns out to be a long-term bear market, it will be the most anticipated bear market in history.
Bear markets usually start when there are extreme levels of optimism and end when the sentiment completely shifts to extreme pessimism.
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