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Another Rolling Bear Market?

The stock market does not necessarily go up in a straight line. The path resembles a dance with 2-steps up for every 1-step down. A pattern of higher lows and higher highs defines a bullish market.

The market also does not go down in a straight line. A bear market decline is faster and steeper, as evidenced by 2-or more steps down for every 1-step up. Sellers would exit the market on rallies, resulting in a series of lower lows and lower highs.

A rolling bear is a rare market phenomenon in which industry groups and sectors decline at various times hence the term rolling. It is akin to utilities announcing rolling blackouts during a summer heat wave.

Under this challenging market, investors have no place to hide, as sectors by sectors experienced bear market declines. Suffering widespread losses, investors begin to sell their remaining positions, resulting in a capitulation phase.

Several factors can lead to this market condition. (1) Dramatic change in macroeconomic conditions (i.e., inflation, recession, stagflation, etc.). (2) Market is fully priced or fully valued. (3) Widespread speculation and bullish sentiments, resulting in all the good news priced into the stock market. (4) Changes in credit conditions and monetary policies.

From a diversified perspective, if different sectors are moving independently, this can mitigate portfolio risks. However, in a rolling bear market where sector-by-sector are selling off, a diversified portfolio does not minimize risks but can compound losses.

Another rolling bear market may be developing. For technology, small-cap, and growth sectors, they started in Nov 2021. For listed large-cap markets, it began in January 2022.

Major S&P 500 sectors are down except S&P Energy (XLE +29.97%) on a year-to-date basis.

Three (3) S&P sectors are currently in bear market territories (XLY -30.48%, XLC -29.04%, and XLK -25.58%).

Another four (4) S&P sectors are in deep corrections and approaching bear territories (XLRE -19.93%, XLF -19.39%, XLI -18.27%, and XLB -17.97%).

Interestingly, three (3) defensive sectors are still in modest correction phases, including XLV (-9.13%), XLP (-6.22%), and XLU (-3.84%).

Although XLE has fallen 24.72% in the past month, it is still up 29.97% for the year.

In a rolling bear market, low-beta and dividend-yielding sectors will also succumb to selling pressures. Leadership sectors such as XLE will also fall out of favor when investors turn decisively pessimistic.

In the past two decades, there have been two rolling bear markets - the 2000-2002 tech/telecom bubble and the 2007-2009 global financial crisis). Late-cycle economic sectors such as S&P Energy (XLE) tend to peak much later than the broad market (SPX) peak. However, after peaking, XLE also succumbed to strong selling during the second half of the bear decline.

Is this indeed a rolling bear market?

If so, does this imply the defensive sectors (i.e., XLV, XLP, and XLU) and the late-cycle S&P sectors (XLE) also catch up to the declines of the early-cycle economically sensitive sectors and growth areas? Given the sharp declines in the S&P sectors this year, does this signal the Nov 2021/Jan 2022 bear market may be more than halfway through its overall decline?

One last point worth mentioning - if the remaining S&P sectors also suffer bear market declines (greater than 20%), does this lead to a capitulation phase, signaling the end to the rolling bear market?

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

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