The Stock Market’s Head Fake

"The worst is behind us,” declared the talking heads on CNBC back in March of this year. Wall Street is quick to declare the end of market declines and the resumption of the bull market. Is it really that easy? Could we go through 6 months of market decline and erase the irresponsibility of the past 5 years? Could the debt bubble come and go and everything be OK?

Unfortunately, I don’t think that it works that way. History would suggest that bear markets are a long and complicated process. I still stick with my analysis that the March 2008 low in the stock market was temporary and the rise in the stock market from March until May was nothing more than a bear market rally or a stock market head fake.

The stock market is cruel that way. It has a way of convincing everyone that it is OK to get back in stocks. Once people are suckered back into the market, the selling starts again.

Let’s look at past bear markets and see if there is a pattern:

A decline started in November 1968 and lasted until March 1969 (4 months). The stock market rallied from March 1969 until May 1969 (2 months). Then stocks proceeded to lose -31%.
A decline started in January 1973 that lasted until August 1973 (8 months). Then the stock market rallied for 2 months. Then from October 1973 to September 1974, the stock market lost -39%.
A sharp decline started in March 2000 and lasted for a few months. Then the stock market rallied for 4 months until September 2000. Then the stock market proceeded to lose 26% until March 2001. The stock market rallied from March until May (2 months) and then lost another -26%.

The stock market started a decline in October that lasted until March 2008 (5 months). It then proceeded to rally from March to May 2008. What happens next?

I think that we are starting to see what happens next. The problems are showing up way beyond the credit and real estate crisis. We are seeing the development of the worst of two worlds – economic weakness and inflation. It is going to be tough to turn this ship and declare the decline that started in October 2007 is over.

As I have said many times before, I stink at predicting events. It is not my intention to do so. My intention is to show you what I am seeing and the many parallels to historic stock patterns during the beginnings of bear markets. This current decline has that feel to it. If that is correct, there is a whole lot of selling left before this is all over with.

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