Bear Market Underway
In case you are not aware, we are in a global bear market for equities. This bear market is less than a month old and still contains significant destructive energy. It was inevitable that we would see a bear market after a lengthy bull market. The question now is how long it will last and how we will spot the end of the bear market?
Bear Market Psychology
Bear markets are all about fear. People suddenly shift from being greedy to being fearful of losing capital. As a result, sellers begin to outnumber buyers which forces prices down. As equity prices fall, investors become even more fearful and start to increase their selling efforts. This creates a vicious circle of declining equity values.
When will it End?
I would estimate that the bear market will be quite severe, with equities giving up close to 50% of the gains they made in the 2003-2007 bull market. In terms of length, bear markets usually last for about 25% of the length of the preceding bull market. That would make it a one year bear market ending sometime in the summer of 2008.
What to Watch for
Bear markets are usually coming to an end when non-business magazines feature a cover story that declares that a bear market is underway. By the time it makes it to the cover, everyone has accepted the downward trend and everyone who wanted to sell has done so. Now with fewer sellers, equity prices begin to rise as buyers start to bid up prices. Welcome to the new bull market!
