Indicators Now Suggest Bear Market Ahead. What Does This Mean?

The stock market is showing signs that many investors dread: a bear market may be on the horizon. This is not about whether a company is strong or weak, but about the flow of money in and out of the market. When money stops buying stocks, prices tend to fall. Understanding this shift can help you prepare and make informed decisions.

How Money Flow Drives Market Movements

It is easy to confuse the demand for a company’s products with the demand for its stock. These are two very different things. A company might be doing well selling products, but if investors are selling its stock, the stock price will drop regardless of earnings. The stock market is driven by supply and demand for shares, not the company’s sales figures. That said, over the long term these should align.

To track this money flow, I use two key indicators on the S&P 500 index over a long-term, 20-year monthly chart: the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD). These tools, available in most charting software including the free versions, help reveal whether money is entering or leaving the market.

What the RSI Tells Us About Market Conditions

The RSI measures how overbought or oversold the market is. When the RSI goes above 70 (with standard settings), the market is considered overbought, meaning prices have risen too fast and may soon fall. But an overbought market can stay that way for some time. Just because a stock or index is overbought, that does not mean it cannot be more overbought, continuing higher, or staying overbought for years! Selling early just because it is overbought can cost considerable gains.

The critical signal comes when the RSI falls solidly back below 70 after being in that overbought territory. This change suggests money is starting to flow out of the market. It is a warning sign that the upward momentum is weakening.

The Role of the MACD in Confirming Trends

Because the RSI can be volatile, I also watch the MACD for confirmation. The MACD shows the relationship between two moving averages of price. A "bearish MACD crossover" happens when the MACD line (green) falls below the signal line (red). This crossover indicates a shift from buying to selling pressure.

Recently, the MACD has crossed bearish territory on the monthly chart. If this pattern holds through the end of the month and repeats next month, history shows a very strong indication the start of a bear market has occurred.

The Chart

This 20-year monthly chart of the S&P 500 on the top shows the long term trajectory of the S&P 500 index. The bottom half of this chart shows you the two indicators I discussed above.

Historically, you can see that the RSI moves first below the overbought line at 70, but the market can keep rising. The confirmation of the bear market happens when the MACD also performs a bearish crossover, which it just did.

We usually wait for confirmation to call it. In early 2025, I did call it early, and almost as fast as I called a bear market, favorable tax news out of Washington DC announced by the new administration sent the markets into another leg higher.

Using a combination of these two indicators eliminates noise. In the short term, these indicators can fluctuate rapidly. By using both, the short-term fluctuations, including normal market "corrections" are factored out to better show the broader money flow pattern, being significantly certain the pattern is in place. In other words, an excellent indicator of bull markets changing to bear markets, and vice-versa, while not reacting to shorter term 5% or 10% corrections.

The Economy

But the economy is still growing and quite strong. How can we be staring at a bear market?

It is important to note that the stock market leads the economy, not the other way around. Growth happens where money flows. Growth stops happening where money stops flowing.

The market leads the economy by 6 to 9 months. An extremely common pattern is for the economy to still be showing growth while the stock market is persistently dropping. Later the economy follows, and similarly drops. The same is true when a bull market begins. It begins first with the stock market, with the economy following 6 to 9 months later.

This time, it is not difficult to believe the economy could weaken. Some critical factors which play into this scenario include:

• The recent, ongoing, and significant collapse of the private credit market, with multiple lender failures including critical funds at Blackrock and Blackstone, among others, which have stopped investors from redeeming shares in these specialized funds. This specialized market is very large and is revealing that nothing has truly changed in our banking system since 2008. Banks and investment firms are still gambling with highly speculative offerings, instead of lending money in a boring traditional way.

• Gas prices just doubled due to the Iran war. Unless you own shares of the oil companies, gas prices are like a tax increase and will significantly impact economic activity if prices remain high for a prolonged period.

• Massive debt overhang, starting with a $38 trillion federal debt. But some large municipal markets are in trouble too, like Chicago facing potential bankruptcy: Chicago's debt crisis a 'pay later' cycle, Illinois Policy Institute expert warns | Fox News.

• Personal debt of individuals is also at the highest levels ever, signaling little room for error. Any job losses, and the typical consumer will be unable to pay bills, including paying those loans, in far less time than past cycles.

• Interest rates are drifting higher. Interest rates can be considered the "brakes" of the economy. Lenders raise rates when they deem the risk of being paid back to be higher than previously.

What This Means for Investors

A bear market means stock prices are likely to fall for an extended period. The average bear market lasts for 11 months, with the longest being 2.5 years. This can be unsettling, but it is also a normal part of market cycles. A typical bear market will see an average market decline of about 36%, with some stocks falling much more. Some bear markets have seen 57% shaved off the major market indexes!

But not all stocks behave the same. It is not so much a stock market as it is a market of stocks! Food and beverage stocks that pay solid dividends are far less volatile than say a smaller startup in the tech industry with questionable and highly variable profit margins.

Here are some practical steps investors can take:

• Review your portfolio

Check if your investments match your risk tolerance. Consider reducing exposure to highly volatile stocks. Focus on larger dividend paying stocks selling products absolutely needed in today's world.

• Focus on quality

Companies with strong balance sheets and steady cash flow tend to weather bear markets better.

• Diversify

Spread investments across different sectors and asset classes to reduce risk.

• Avoid panic selling

Selling in a downturn can lock in losses. Instead, look for opportunities to buy quality stocks at lower prices.

• Stay informed

Keep an eye on market indicators and economic news to adjust your strategy as needed. This is where I help offering my views on the market, as I live, breath, and eat the market data day and night, and have since the 3rd grade over 50 years now!

What am I Doing?

I have a simple strategy. I am doing nothing! And contrary to what you might think based my writing above, I actually BOUGHT shares of Microsoft (MSFT) this week! More on that in a moment.

Those of you who follow my investment style know that I do NOT take excessive risk. Most of my portfolio is in brand name stocks you all recognize with the largest holding being AT&T. I also own a significant position in Verizon. Regardless of the economy, or even whether people have a job, you WILL have a cell phone and pay for it! The key feature of these stocks is their above average dividend. Regardless of where the stock price moves, I get paid every quarter!

My largest sector holding is oil and gas, with significant positions in ExxonMobil and Chevron. I also hold decent positions in Hess Midstream and Enterprise Products Partners, both of whom focus on the midstream oil markets. All of these similarly pay large reliable and growing dividends because you WILL use energy, gas, and plastic which is made from oil. These pay dividends in months the telecom companies do not, creating a hefty payment every two months of each quarter. And regardless of whether the economy falters, shares of the oil companies soared to new highs with the start of the Iran war. Global uncertainty is likely to keep those share prices aloft.

Finally, another major dividend holding is Altria. While everyone keeps predicting the demise of cigarettes, this company keeps churning out profits charging even more for their product. They are also expanding into other industries like vaping and alcoholic beverages. All of these industries are recession resistant, and may even benefit from a recession. The dividend here is paid in the final month of each quarter.

From these industries alone, I get paid hefty reliable dividends every month of the year! The Iran war significantly boosted my net worth, while the reliable telecom stocks have barely moved. And Altria, it's another low beta stock that doesn't move significantly with the market.

That said, I recently increased my holdings of Microsoft, NVIDIA, and Google, with my main focus now on Microsoft, having fallen from $550/sh to $381/sh, a drop of 31% in spite of higher profits!

AI is a real thing, and this stock drop for the leader in AI technology and the steady cash flow Microsoft makes from its Azure cloud and desktop products appears to be overdone.

Corporate and government investments in IT cannot just be shifted elsewhere or thrown out. They are very "sticky" due to the high costs of changing them, and the complexity involved in these critical systems. And this makes Microsoft's profit margins very "sticky" as well, regardless of the economy!

I will continue to buy shares of quality companies that are priced well regardless of the overall market conditions. In fact, the lower the market goes, the more aggressive I will get with my buys.

Examples from Past Bear Markets

Looking back at previous bear markets, similar signals from RSI and MACD preceded significant downturns. For instance, before the 2008 financial crisis, the RSI moved out of overbought territory, and the MACD showed bearish crossovers on monthly charts. Investors who recognized these signs had time to adjust their holdings, trimming very risky positions in favor of more stable dividend plays.

I will say the bear market of 2008 was very different. It was not just a bear market. For all practical purposes our entire banking system failed, and had the government not intervened, we would likely still be in the resulting economic depression. I DID sell stocks at that time, moving money to very safe places like Treasury bonds and precious metals. But I also learned to NEVER underestimate the ability of government officials to break every law and rule on the books to intervene and thwart a crisis like that.

During the 2020 market crash caused by the pandemic, these indicators also signaled the shift early. Those who paid attention could reduce risk or find buying opportunities during the recovery. It was during that time I loaded up on the oil majors when oil prices went "negative" for the first time in history, demonstrating just how bizarre markets can get.

Final Thoughts on Preparing for a Bear Market

The current signals from the RSI and MACD suggest that a bear market may be starting. This does not mean every stock will fall, but the overall market trend is likely downward. Investors should focus on managing risk, maintaining a diversified portfolio, and staying patient.

Bear markets are a great time to accumulate shares of great companies while they are on sale. Those dividend cash flows get much less expensive. There is a huge difference in speculating on higher stock prices that can be reversed in the blink of an eye versus investing in reliable cash flows that also grow with time.

Bear markets can be challenging, but they also create chances to buy strong companies at better prices. Understanding market indicators helps you make smarter decisions and avoid costly mistakes.

Take time to review your investments and plan for different scenarios. Staying calm and informed is the best way to navigate uncertain markets.