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Is it Finally Time for Market Optimism?

This article was written by in Investing. 9 comments.

The Dow and the S&P 500 indexes were both up 2.5% and the Nasdaq index was up 3.1% today. Is this a sign of things to come? I wouldn’t mind if it were. My 401(k) has been decimated this year. That’s a literal decimation, a reduction of 10% of its value. Based on the short history of stock market recessions in the United States, the worst may be over.

The S&P 500 passed a total decline of 20% from last October’s peak on July 9. Here is what history has to say about 20% declines, the signal of a “bear market.”

[S]oon after the onset of a bear market, the market generally has risen. One month after breaking the 20% threshold, the S&P had gained 3%, on average, during those nine bear markets. Two months later, it had risen 6%. on average. Three months later, it was up 5%, and six months later, the S&P had returned 7%. Twelve months after the initial decline, the market had surged 17%, on average…

So far, this bear market has unfolded exactly as the past nine did. On average, the nine crossed the 20% decline point nine months after beginning their decline. We’re right on schedule. The past bear markets lasted, on average, another five months…

My hunch is that the market will decline another 10% or so before it hits bottom.

History is generally a good guide, even though the human brain often has a hard time remembering history as it actually occurred. Looking at the numbers is more reliable than memory, so there may be hope for the market in store by the end of the year. By investments accounts will be thankful.

Goodbye, Bear Market?, Steven Goldberg, Kiplinger, July 14, 2008

Published or updated July 17, 2008. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 9 comments… read them below or add one }

avatar KC

I’m not completely sold on total market optimism right now. I think things will be flat for a while yet. But I do think there are certain sectors and stocks that are bargains. A few months ago I purchased a few oil and energy stocks. They have pulled back recently, but I still think I got a great deal on a few long term stocks. Look at something like DE – it is down for no good reason – its a great company and its on sale right now.

I’ve noticed financials have made a comeback in the last few days. I still wouldn’t touch those with a ten foot pole. There are more right downs to come. Maybe when they hit single digits will stocks like C and WB look appealing once again.

That being said (that the market will be flat for the rest of the year) if you are into dollar cost averaging then by all means continue to make timely purchases of total market equities (indexes, etc). We may not be at a bottom, but we’re close – indexes are on sale.

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avatar Dan

I’m so glad I didn’t have my Roth IRA money for 2008 ready the first week of January like I’ve done the last few years!

Just put in my first $2k last week at what was a YTD low. Maybe the markets will manage to sink some more before I manage to save up that last $3k….

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avatar matty dread

i would not be totally optimistic. i think things will muddle along and it will be a really slow housing market going into this winter and christmas spending will be muted.

but if you can stockpile now that would be good. i am thinking april of 09 will see the start of growth again…..

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avatar MoneyNing

It’s always impossible to time the market but the last two days of gains sure feels great!

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avatar Keith

Bear. Market. Rally.

I agree that we’ll probably see another 10-15% decline from the lows, if this is in fact an ordinary recession-type scenario. If it’s worse, who knows.

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avatar James Woolley

I personally think we’re very close to the bottom now. There are a lot of bargains around now, even in the oil sector, and a lot of the bad news appears to be already priced in.

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avatar castocreations

Unfortunately, most people will still be in a negative mood and emotionally selling when they should be buying. Too many people sell low and buy high due to emotion. This is actually the time to invest more. As hard as that may be to accept emotionally.

Of course, past performance is no guarantee of future performance. :) A standard line in the financial world.

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avatar shadox

Personally, I think it’s a bear trap… we’re not done yet. That’s not to say that I am pulling back on my existing investments or refraining from new ones – in fact, just this week I put another chunk of change into the market. I do it every month, on the same date, regardless of how the market behaves.

The economy is in for a tough time. I don’t think the volatility and downward pressure will end before late this year or early next.

Always remember – stock investing is a longer term plan…

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avatar Apex

The problem with averages is that they never happened. The human brain has a tendencancy to hear statistics about averages and assume this is the way the other 9 occured. None of the other nine happened like the average. Some where much milder, some were much harsher, some were close but still sufficiently different than the average.

Its also the case that in each of those other cases there were various other macro factors, involving employment, energy, local and global economy, interest rates, world affairs, etc. These things don’t happen in a vacuum. So are current conditions closer to the milder bear markets or the harsher ones or neither. Answer that question would likely be more instructive than comparing the average decline to the current one and thinking it will repeat.

That thinking would not have worked out so well with the nasdaq in early 2000. A 20% haircut was soon to be followed by 2 more years and 60% more off the top.

The market is always the same, it follows cycles of fear and greed that leave it almost always out of balance and it is in a constant process of readjusting to the norm. The problem with predicting it is that the details of how it does this are different each time.

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