The Evolution of a Bear Market: Here’s How This One Developed – RealMoney

Market participants like to find historical comparisons for market actions. They look for similarities to past cycles so that they have some sort of roadmap as to how the current cycle will develop.

Unfortunately, every cycle is different. The cycle itself is inevitable, but the way that it develops and evolves is always different.

The current cycle is a good example of why it can be so difficult to navigate a bear phase. Although it is not apparent from the indexes, this bear phase started back in February 2021. That is when special purpose acquisition companies (SPACs), meme stocks, biotechnology, cannabis, ARK Innovation ETF (ARKK) names and a number of other sectors and stocks topped out. They have been in a downtrend for over a year now and still have not found a bottom.

For many months I wrote about how this poor action was not reflected in the major indexes or many big-cap socks. The FATMAAN stocks remained a safe haven and outperformed for most of 2022, but the Nasdaq 100 finally topped out in late December, and that is when the business media finally started to recognize the broad market deterioration.

In the past week, the bear market action has accelerated. There has been extremely poor breadth, terrible price action, and two days where downside volume was more than 90%. This is classic bear market action.

Despite how poor this action has been, the Dow Jones Industrial Average and S&P 500 still have not met the classic definition of a bear market, which is a fall of 20% or more from the highs. Many market participants believe we can't hit bottom if the senior indexes still aren't in a technical bear market.

That disparity between the indexes and the majority of stocks has been the most difficult aspect of this bear market so far and creates great uncertainty as to how it will resolve itself.

For now, the best approach is to stay patient, protect capital, avoid the inclination to predict market bottoms and wait for better price action. This is a bear market and it is still evolving and developing. It is going to take time to work through it, but eventually the cycle will shift like it always does.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

See the article here:

The Evolution of a Bear Market: Here's How This One Developed - RealMoney