Bear Market Is Now Official Per My Indicators

This past week, the stock markets were pummeled. The S&P 500 index began the week at 5581, and finished at 5074, a loss of 9.1%. While some would argue this week alone represents a "worthy correction", my indicators just signaled the start of a bear market....an extended period of selling lasting 6 to 24 months, with only brief sharp rallies along the way.

As I mentioned in emailed letters (before I began this blog), a bear market is generally defined as a major stock index, such as the S&P 500, losing 20% or more. The average bear market sees the S&P 500 lose 36% over an average period of 375 days. Nobody, no matter how professional, can tell you how deep, or how long, a bear market will be. If they say with certainty, they are either lying or uninformed. All predictions, including mine, are purely informed speculations.

On Thursday, the Dow Jones Industrial Average (DJIA) dropped roughly 1200 points, and on Friday, it lost another 2231. Since this downturn began at the start of February, the DJIA losses have totaled 6563 points, or about 15%. It won't be declared a bear market until the losses are more than 20%. Let's review my indicators, showing why I now have confidence that will happen.

Below is a 25-year candlestick chart of the S&P 500 index (produced for free from Yahoo Finance). Each candlestick represents one month of market activity, and the range of the market over the month. This chart also includes two technical indicators, the MACD and RSI with commonly used settings (you can read about these indicators on the internet, along with the math behind them).

S&P 500 Index, 25-year monthly candlestick chart with MACD & RSI technical indicators

Starting with the RSI indicator at the bottom, we can see the "overbought" territory above 70, and the "oversold" territory below 30. Just because the market is overbought, that doesn't mean it cannot become more overbought, or stay overbought for an extended period. To signal a change from bull market to bear market, I want to see the indicator rise into overbought territory, and it is when it clearly pulls out from that area trending below 70 again that I begin watching for a bear market. We can see this happen around November 2024 when I first began warning of a potential bear market (which of course had nothing to do with tariffs! Tariffs are the "blame Trump" excuse, not the cause of the downturn. A bear market was in the works with or without tariffs).

In addition to the RSI pulling out of overbought territory, I also wait for a signal from the MACD indicator to perform a bearish crossover, where the green line falls below the red. This event happened this week.

These two indicators combined show a clear trusted signal that money is moving OUT of the market. And if money is flowing away from the market, I don't care how good a stock is, the price of that stock (or index) will drop. Never confuse the supply & demand for a stock with the supply and demand for a company's product! It can be the greatest company in the world, but if nobody wants to own the stock, the stock price will go nowhere. In the super long term, these should align, and that is the method Warren Buffett uses. He always owns long term, a method I generally follow. Or as he says, "My favorite holding period is forever."

A few weeks ago, and as early as November, I began suggesting the sale of riskier positions. With a highly probable bear market now less than 1/4 of the way through, I continue to suggest this action.

Not to panic, I continue to hold major positions in companies like AT&T, Verizon, Microsoft, Chevron, ExxonMobil, Genunine Parts Company, General Motors, and others. Both AT&T and Verizon rose strongly on Thursday, but succumbed to the selling on Friday. I also maintain moderate positions in gold and bitcoin. I will continue to buy shares, but I will be much more selective in what I buy, ensuring long-term cash flows remain solid and predictable.

How long will the bear market last? At this time, my suspicion is this one will be deep and quick. I don't see it dragging on much beyond 6 to 9 months. The M1 and M2 money supply numbers still show growth in the money supply. Also, the 10-year bond yield has been dropping, and with lower interest rates, the markets will be cushioned.

Furthermore, in spite of the rhetoric, many companies have already begun moving their manufacturing operations back to the United States to avoid price increases caused by tariffs. This will help the U.S. economy. We are also seeing foreign countries willing to deal. They are unhappy about it, but it is still their best path forward, providing significant tax revenue to the government, thereby lowering the need for federal deficits and borrowing.

Tariffs are most definitely in America's best interest. Prior to 1913, it was the primary tool used to fund the federal government, and all through America's fastest periods of growth in the 1800s. Prior to 1913, a federal income tax was illegal. America had become so wealthy, we struggled to decide how to deploy the vast wealth we had created.

Until the new paradigm of "America First" becomes completely accepted (globalists are still hard at work trying to weaken America) and the factories and jobs come home in full-force, I consider this bear market a bump in the road. But then, when you look at the chart above and ones that show longer periods, all bear markets have been just a bump in the road. Never underestimate America, and its foundation of individual freedom, free capital markets, and the ingenuity of those with a dream!