Saturday, July 26, 2008

This Bear Market May Have More Bite

From the New York Sun:

Yesterday's wicked 283-point drop in the Dow Jones Industrial Average lends renewed credence to the increasingly worrisome view that the bear market may have a lot more teeth. Supporting this argument is an intriguing study by the chief investment strategist of Standard & Poor's, Sam Stovall, which looks at more than half a century of data to conclude it's far too soon for the bear to hibernate.

Last week's three-day, 528-point jump in the Dow may have been little more than a short-lived bounce, as the report opens the possibility of an additional 12% drop in the Dow before year-end.

The thrust of Mr. Stovall's study is to provide investors with an insight into how stock prices fare following a bear market decline, and to offer some perspective on the length and depth of a bear market.

A market is in bear territory when stocks decline 20% between peak and trough. The latest bear market, as reflected in the S&P 500, kicked off October 9, and in theory became official almost nine months later, July 9, when the index crossed the 20% threshold.

Whether the bear has had enough after that 20% drop is anyone's guess, but judging from the study, the answer is no. History shows that the S&P 500 doesn't cross the 20% threshold until two-thirds of the way through the overall decline. In other words, there's another third to go before anyone can legitimately claim the bear is dead....Go here for the conclusions.