How to tell a bear market from a bullish correction

This week was a big test for the markets.

Tuesday – January 19^th – is traditionally party day for the bulls.

What’s so special about that day?

Well, US holidays often produce turns, and it was the day after the long Martin Luther King weekend.

But, more importantly, it’s also tied in with the first option expiry of the year. Options traders who’ve taken a loss will be hedging hard this day. And, they won’t want to be showing a loss on their books this early in the year.

All in all, it was the perfect opportunity for the bulls to come out in force. And they did, planting plenty of green candles on major indices.

The test is, whether it’s sustainable. If this pullback had any power, we could have held onto the notion that we were in a bullish correction rather than a bear market.

But Wednesday put an end to it.

How to tell a bear and bull apart

The definition of a bear market is a downturn of 20% from highs on a major market index. The FTSE has broken below this level on Wednesday. The S&P and Dow are down around 11% and 12% (respectively), but this figure is massaged by a few high-flyers like Facebook, Amazon and Google. In fact, the average US stock has fallen 26.9 per cent.

Add that more than half of NYSE stocks have been trading below their 200-day moving average since June last year … and it’s hard to make a case for a bullish correction, despite the spike we’re seeing this morning.

Today’s recovery has been caused by hints that the ECB and Bank of Japan can step in with further stimulus. But central banks measures seem to be having less and less impact (China being the perfect example). So have central banks lost their clout? And what is driving markets now?

The big theory being pitted for why central banks haven’t been able to stimulate global economies is: secular stagnation. Secular stagnation is all about money getting ‘stuck’ – last year, S&P500 companies paid out more to shareholders than they earned – which adds up to an overall shrinkage in the size of corporate America. If you want a fantastic, simple explanation of what secular stagnation means, I came across this brilliant article: How secular stagnation came to Smurf village – definitely worth a read if you want to sound like an economic know-it-all.

But stagnation doesn’t just happen in global marketplaces (or Smurf village for that matter) – in our own little ways, we ignore superior returns … we shun risks … and we hide our money under the metaphorical mattress (i.e. in duff investments and savings that are going nowhere).

Without someone putting the fear of god into us, or promising us spectacular returns … we sit on our money, doing nothing.

It’s what most of the population does – leaving their savings languishing in accounts that are making bankers rich, but few others see the benefits.

For us, a bear market needn’t present a problem – what traders want is a clear market direction, and that’s exactly what’s shaping up.

It’s wrong to assume that a bear market is just a bull market turned on its head – downtrends tend to be more volatile, and more aggressive, as fear takes hold. As long as we match our trading to the conditions, we need have nothing to fear.

Fortunately, I’ve some great opportunities coming up that I know will spur you into action, and are perfect for this kind of volatility. I’m hoping to bring you something very special next week, but I’m still negotiating to get Bulletin readers access to this product for free. (I’ll let you know on Monday if I’ve managed to get my hands on this for you.)

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