Hail! Hail! The Bear is dead!… or is it?

On Friday, the Wall Street Journal officially declared the bear market over, stating that the Nasdaq Composite has closed more than 20% above its Chrismas Eve low. Good news, right? While only time will tell if that is indeed is the case, I believe that there is little, if any predictive value in using the old commonly accepted definition of a rise or fall of 20% or more to define bull and bear markets, particularly if those designations are used to imply that a new primary trend is underway and it is safe to move back into a full equity weighting within one’s portfolio.

COMPQ Bear Market Rallies Feb 19th

COMPQ Bear Market Rallies Feb 19th

Somehow, although not surprisingly, that 19 paragraph article neglected to mention the fact that the average initial kickback rally in each of the two previous bear markets plus the 2015 ‘near-bear’ (a period where many sectors and even some of the US stock indexes did experience declines over 20% and considered a bear market by many) have averaged well over 20% as this long-term chart clearly illustrates. Essentially, it is still much too early to break out the bubbly and state with a high degree of confidence that the rally off the Dec 24th lows is or is not simply the bear market rally. Click on the charts below to expand to full size.

I’ve also included the gains for the initial bear market rallies in the S&P 500 & Russell 2000 Small Cap Index for comparison above. When evaluating the vigor of a rally or correction in an attempt to gauge whether is likely the start of a new primary trend or simply a corrective wave with the existing trend, I believe that it is important to view those moves, not in simple percentage terms but rather taken in context with the magnitude of the preceding trend. In other words, relative small bullish or bear primary trends will typically experience relatively small counter-trend corrective wave (rallies or corrections) while much larger trends (i.e.- the bull leading up to the 2000 top or the current bull market, both of which are the two longest & most powerful in history) will typically experience much larger corrective waves.