Are we in a Correction or a Bear market? It makes a big difference. Corrections are when markets fall at least 10% from their top. They generally have multiple rebounds and it’s profitable to “buy the dip”.
Bear markets fall at least 20% and they can be catastrophic if you buy in too soon. Recent Bear markets were the financial crisis of 2008 and the dot-com bubble of 2000.
The first chart (see below) illustrates the depth of the 2000 internet bubble. Note how once support was lost at the “correction-bear” line, the market dropped precipitously. The old Wall Street expression is that the market takes the stairs up and the elevator down. In a Bear market, the way down can often be like falling off a cliff.
The second chart shows the current market condition since 2014. Notice that even with recent volatility, the market is almost 4% above the correction-bear line. So perhaps it’s still safe to buy the dip but be cautious because since July the market has hinted that it’s “rolling over”…making lower highs and lower lows.
The third chart illustrates what a market top looks like and the consequential transition from a Correction to a Bear market. In this graph, I superimposed the two previous charts, and to add emphasis 1999-2001 data was slid forward two months. This juxtaposition isn’t done for drama, like we often see in the headlines [ WORSE MARKET SINCE 1929 !!!! ]. I just want to illustrate that should this market drop below 1850 it’s likely to escalate into a Bear market. Below that level of support, be extremely cautious buying the dip. In Bear markets, the price doesn’t just drop, it collapses like an avalanche.
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