What Makes This Major Bear Different From Others

By The Curmudgeon

1.  Fed's super liquification campaign and emergency coordinated rate cuts failing badly to prop up financial markets.  Ditto for government rescue plans, bank bailouts, special lending facilities to investment banks and now corporations (GE will borrow from the Fed on Monday).

2.  Low and negative real interest rates across the Treasury yield curve for over 1 year and getting even more negative this summer and fall as yields stay low as inflation has accelerated.  Flight to quality investments will lose purchasing power to inflation in coming year(s) but investors want the return of capital and don't care about yield

3.  All sectors, countries, and asset classes are getting creamed, esp. commodities which were inversely correlated to equities from Jan- July of this year.  Now they are getting hit harder!  High grade muni bonds have also taken a tumble, especially those with insurance which investors view as having negative value!

4.  Waterfall decline commenced 2 months before the US Presidential election- totally unprecedented!  The worst previous decline from Democratic and Republican Conventions to Presidential Election was -2%.

5.  Stocks were not particularly expensive going into 2008 and there was not the mania type thinking (e.g. 1968 go-go mentality or 1998-2000 Tech/Internet bubble) to justify high stock prices.  Normally deep market declines start with highly overvalued markets with a "this time it's different" attitude pervasive amongst investors.

6.  There were no divergences or warning flags before the Sept waterfall decline commenced.  NASDAQ, Russell 2000, DJT and S & P (to a lesser extent) were all well above their March lows and making higher lows on each rally failure.

7.  No bounce after severe selling pressure: there have been several 3 out of 4 days where declining stocks outnumbered advancing stocks by over a 5:1 ratio. That has occurred on only 4 occasions in the past 50 years, and every instance saw the market at higher prices both 3 and 6 months later. Even going back into the 1920's and 30's, the overwhelming majority of cases (over 80%) saw the market higher at 1-week, 1-month, 3-months and 6-months after such intense selling pressure.

8. The stock market timers with the best track records have been much more bullish then those with the worst records, according to Mark Hulbert.    Hulbert reported that on Aug 31, 2008 the Stock Timers with the BEST market timing records were recommending 67% in stocks- UP from 64% at the beginning of the month.  Conversely the Stock Timers with the worst records were only recommending 45% in stocks on Aug 31st- UP from 64% at the beginning of the month.   In previous major bears, the top market timers were always more bearish than all other market timers, let alone the one's with the worst track records!

9.  The investing public (usually dead wrong) was very bearish on stocks in early August 2008.  Floyd Norris wrote in his Aug 2 NYT column:  Off the Charts

Could Bear Talk Be a Contrary Signal?

"Americans have turned more negative on prospects for the stock market than at any time in the last 20 years. That may be good news for investors."

With investors super BEARISH in August, contrary opinion would have predicted at least a tradable rally.  Instead we got a Sept meltdown and Oct crash.  How often is the public correct?  

The Curmudgeon

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.