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Bear Sightings

What constitutes a bear market in stocks?

There are many definitions. But I’d say the most common “official” marker for a bear market is a decline of 20% or more from the most recent high.

By that definition, China’s stock market is deep in bear market territory, as I pointed out in my last Wealth Watch article.

All of China’s primary stock indexes, both mainland-listed A-shares as well as Hong Kong-listed H-shares, have already declined 20% from their highs this year.

The Shanghai Composite Index of mainland stocks is down over 30% this year!

For U.S.-listed stocks, however, we’re not even close to an “official” bear market. After all, the S&P 500 Index is only down 8% from its most recent highs in September.

But the bad news is U.S. stocks are beginning to look like the last market still standing amid a sea of bear market red around the world.

China isn’t the only emerging market in bear market territory. It has plenty of company, including India, South Africa, South Korea and more.

Even Brazil, which has been one of the best-performing emerging stock markets of late, is down nearly 19% from its January high.

MSCI

Developed stock markets are reeling too.

Europe’s primary stock index is down 21% from the peak earlier this year. And Japan is dangerously close to bear market territory, 16% below its peak. The reality is most global stock markets are experiencing bear market conditions already.

The real question is are U.S. stocks destined to catch up on the downside with everyone else in bear market territory?

Of course, there are other “definitions” of what makes a bear market.

My personal favorite bear market indicator, as shown below, is as simple to follow as it is effective at predicting further market declines.

The bad news is it’s dangerously close to signaling a bear for U.S. stocks.

INDU

When a stock market index closes below its long-term 40-week moving average at the end of a calendar month, it means the market is in a major downtrend. Further share price declines are likely, and a bear market often follows.

You can see above the Dow is now more than 500 points below its 40-week average, and the end of the month is fast approaching next Wednesday.

This indicator doesn’t always result in a bear market but almost always means a prolonged correction is to come.

The last two times this signal triggered were back in 2015 and again in early 2016.

Fortunately, that trigger did not result in a bear market decline of 20% or more, BUT the Dow did fall over 15% back then.

Today, the Dow is only down about 8% off its recent high, but this could mean more downside risk ahead.

Bottom line: There is a lot riding on where the Dow closes at 4 p.m. on Wednesday afternoon, Oct. 31.

Happy Halloween, and stay tuned!

Here’s to growing your wealth,

Mike Burnick

Mike Burnick
Chief Income Expert, Mike Burnick’s Wealth Watch

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Mike Burnick is the editor of Mike Burnick’s Wealth Watch, Infinite Income, Amplified Income and Spinoff Millionaires. Mike has been bringing his trading strategies to the masses for over 30 years. He has been with Seven Figure Publishing for two years. In 2018, the average return of Infinite Income...

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