With the S&P 500 now in bear market, despair and capitulation are the next stages of investor grief

The S&P 500 SPX,
-3.88%
officially entered the bear market on June 13, falling more than 20% from the high of January 2022. Although there is no way to know how much further the shares will fall to their final bottom, the chances are good that when this happens you will not feel much worse about the prospects of the stock market than you already have.

This is the conclusion I came to when analyzing the sentiment in older bear markets. I found that the biggest drop in investor sentiment tends to occur sooner rather than later in bear markets. At the point where the market falls below the 20% loss limit, the investment climate is already as pessimistic as it will be in the final low of the bear market.

This does not mean that the bear market is over. But exceeding the 20% loss limit means that we have moved on to the five stages of the downturn grief I wrote about a month ago.

A good picture comes from three different emotion surveys during the 2007-2009 bear market. When this bear market first exceeded the 20% loss threshold in July 2008, the market climate was almost as pessimistic as it was at its final low in March 2009, when the S&P 500 was 57% lower than what was in its bullish market in October 2007. high. Here are the specifics:

  • In July 2008, the average recommended level of stock exposure among short-term market timers had already fallen by 87 percentage points from the highest level in October 2007. It would be just 6 additional percentage points lower at the bottom of March 2009. (These the numbers reflect the average of the two stock market indices my company calculates: the Hulbert Stock Newsletter Sentiment Index and the Hulbert Nasdaq Newsletter Sentiment Index.)

  • A similar picture is presented by the emotion research conducted by Investors Intelligence. The results of this survey are reported as three percentages – the percentage of advisers who are up, down or up but waiting for correction. I translate these results into a single number by calculating the proportion that is upward as a percentage of those that are either upward or volatile. This percentage fell by 37 percentage points from the high of the October 2007 market to the point in July 2008 when the S&P 500 exceeded the loss limit of 20%. It was only one percentage point lower than the March 2009 low.

  • An even more striking picture comes from the American Individual Investors Association’s survey of individual investor sentiment. As with Investors Intelligence, I translated the results of the AAII survey into a single number, calculating the percentage of respondents who are ascending as the percentage of those who are either ascending or descending. This percentage fell by 39 percentage points from the high of the October 2007 market to the point in July 2008 when the S&P 500 exceeded the loss limit of 20%. It was actually 5 percentage points higher than the March 2009 low.

What happened during the Great Depression was not accidental, moreover. After analyzing all bear markets since the mid-1960s in the Ned Davis Research diary, I found that 88% of the climate decline during bear markets occurred before the S&P 500 had fallen 20 percent. %.

Emotion in the last stages of a bear market

If the feeling is as gloomy when the definition of a bear market is met for the first time as at the end of the bear market, how can an adversary distinguish the difference? The answer lies in the stubbornness with which the downward trend is maintained.

The downside feature of the bear market is that the initial rally from the low is unreliable, which is nothing more than a trap of the bear market. On the contrary, the hallmark of a bear-market rally is the impatience to believe that happy days are here again.

If the current bear market follows the historical scenario, we are entering a period in which the bear is slowly stepping aside and eventually eroding the willingness of investors to buy the dive. Then the final low of the market should approach.

Therefore, be vigilant about when investors react to a rally sitting on their hands. The rally in late May did not meet this condition, as I wrote in a column earlier this month. Eventually, someone will do it.

Mark Hulbert is a regular contributor to MarketWatch. Hulbert Ratings monitors investment prospectuses that pay a flat fee for auditing. It can be accessed at mark@hulbertratings.com

More: This Wall Street legend has lived in every bear market since the 1950s. He says what is coming could hit the S&P 500 with a 30% loss.

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