Wednesday, July 15, 2009
Can we pinpoint the bottom of a bear market?
This is one of those questions where if we knew the exact answer we could probably make a fortune. Unfortunately, we cannot pinpoint the bottom of a bear market in real time, but according to money manager John Hussman (www.hussmanfunds.com), there's an anecdotal measure that might help us narrow the timeframe.
In his June 29 commentary, Hussman discussed the concept of "assumed permanence of unusual conditions" to help describe both major market peaks and major market lows. He referenced the 2000 technology peak, the recent housing peak, the 2007 stock market peak and the 2008 oil peak as examples of investors believing in the "assumed permanence of unusual conditions" to justify such high prices. We now know that those "unusual conditions" were anything but permanent.
Conversely, he said the same sentiment applied back in early 1982 to help justify why the stock market was dead and would continue to be dead for years. Of course, in August 1982, the stock market took off on an 18-year bull run.
What we're really talking about here is that at certain times, investors might become so euphoric or so despondent that they believe the current trend will last for many years. Today, investors are understandably concerned about the financial markets. We've been in a down cycle since October 2007 and there's plenty of anxiety about how much longer it will last. But, have we reached the point where many investors take it as a given that these unusual economic and market conditions will be permanent?
Hussman suggests that when or if we reach this point of "assumed permanence of unusual conditions," then that might be the time when we create a floor from which a new long-term bull can begin. It's a great theory, but we have no empirical way of measuring when we hit this point. Despite the inability to measure it, we will keep our eyes open to try to spot it and profit from it.
"You are on the road to success if you realize that failure is only a detour."
-- Corrie Ten Boom
Greg K. Womack, CFP