The bull market is over – we're in a bear market now
By
Dominic Frisby Mar 16, 2011
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It's taken the devastating combination of an escalating sovereign debt crisis in Europe, revolution across the Arab world and one of the most horrific natural disasters in modern history to finally take this two-year bull market down, but take it down it has.
Until mid-afternoon yesterday, when we saw some welcome respite, this week has seen nothing but inexorable, across-the-board selling.
It's felt like 2008 all over again. It doesn't matter what you own, quality or not, everything has been sold. The baby has been thrown out with the bathwater. Panic has set in.
This is one of those times, if ever there was one, to 'keep your head when all about you are losing theirs'.
So let's take a step back and think…
This sell-off started before the Japanese disaster
Historians may well look back and see it differently, but this sell-off began before the Japanese quakes. Emerging markets have been trending down since December last year. Despite new highs in gold and silver, the major gold stocks also made their highs late last year. The DAX, the FTSE, the Dow, the S&P 500 and the Nasdaq all peaked later, around February 21st.
Even uranium stocks, which are down by about 40% in barely two days (!) this week, were trending down a good three weeks before the earthquake hit. In fact only the CRB, the commodities index (which is heavily weighted to oil), was making new highs last week.
It has hugely exacerbated it, yes – it has turned it into something more serious. But the Japanese crisis wasn't the initial cause of this sell-off.
In fact just last week, the day before the quake, I wrote: "It could be that this turn down (in the gold-silver ratio) is the beginning of the next phase of the financial crisis. It wouldn't surprise me. It's long-overdue and there are bearish signals all over the place. Senior gold stocks have been in a downtrend since late last year, even although gold has been rising. Emerging stock markets have been falling, although their Western counterparts have been rising. And a spike down in the gold:silver ratio often marks a major market turn".
But this is all academic. We need to recognize the environment we're now in. And the short of it is this: the bull market is over. We're in a bear market now.
It's time to sell the rallies
The first thing we can expect in the coming days is huge volatility. We've seen that to the downside already. At some stage – hopefully sooner rather than later, and it may even have started yesterday – we’ll get the bounce. And we’ll be able to learn a lot about what lies in store by the magnitude of that bounce.
Trade this volatility at your peril. Some will earn fortunes doing so, but many will not. Once the dust starts to settle, we can get a clearer idea of where things are trending.
Those that went defensive and started to take cash off the table as this bull market became more and more extended will be mightily relieved they did so. Those that didn't should use rallies to build up cash for the opportunities that bear markets inevitably create.
For my part, this is what I see ahead.
The Nikkei has already been the hit hardest of any market. I hate to say it - and not everyone in the MoneyWeek office agrees - but I think that’s likely to continue. It's rallying as I write this, and should bounce from these oversold levels. There will also be some buing opportunities in individual stocks. But I'm afraid it looks doomed to eventually retest its 2009 lows around the 7,000 mark. Too many Japanese companies have been too badly beaten up by all of this.
But who knows? Maybe that will mark the final low at the end of Japan's interminable bear market, just as in 2001 commodities retested their 1999 lows and finally ended their 20 years in the doldrums. Here we see a log chart of the Nikkei since 1988.
The Dow hasn't been much better than the Nikkei
Many may look at the Dow over the last two years and think what a wonderful market it's been, while they look at the Nikkei over the same period and think, 'What a dog'. But this has largely been a result of the relative currency weakness. This week aside, the Nikkei's recent performance isn't as bad as it may seem.
If you take the Nikkei and measure it in US dollars, and take the Dow and measure it in Japanese yen, the performance has been virtually identical. This is shown in the chart below.
The strength of the Dow has been an illusion created by currency weakness.
The yen has been rallying as stocks are liquidated and cash pours into the area. This might well continue for as long as the stock market declines. Then these two may well turn together, perhaps as soon as early summer, as the spending and inevitable money-printing continues. (I bet the Japanese government will wish they hadn't spent as much these last 20 years and got into so much debt, when they didn't really need to).
For now, the Japanese must enter a period of mourning. And our thoughts and prayers should be with them as they do so. But once they start that rebuilding process, they will do so with great persistence and energy. And they're going to have to import a lot of iron, a lot of copper, a lot of cement, a lot of energy. The Daily Telegraph says this "tragedy is expected to become the costliest natural disaster in history, with the repair bill likely to top £100 billion".
So as we emerge from this panic, and the dust settles, commodities will likely resume their secular bull market, while stock markets and currencies continue to meander.
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