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Cyclical Bear and Structural Bull

There remains a lack of a universal definition to identify a bull or bear market. Some define a bull market when stock prices rise by 20% or more after a decline of 20% or more, and vice versa for a bear market. Bull and bear markets are challenging to forecast. It is often confirmed after it has happened.


Securities and financial markets tend to rise and fall during a trading session. A bull market denotes an extended period when the security prices or financial markets are rising continuously. Bull markets tend to last for many months, quarters, and even for many years. Bull rallies are denoted by investor optimism, investor confidence, and high expectations for a long period. Some believe investment psychology and behavioral finance play a critical role in the marketplace resulting in long-term trend changes.


Bull markets often occur when the economy is recovering, strengthening, or expanding to coincide with the trough and the expansion phase of an economic business cycle. A rising gross domestic product (GDP), declining unemployment rate, and strong corporate earnings and profits denote a bull market trend. Investor confidence and optimism also tend to climb during a bull market trend. The demand for stocks, capital markets, and IPOs activities are positive or strong during bull markets.


Bear markets often develop when the economy is peaking, weakening, or contracting to coincide with the peak and the contraction phase of an economic business cycle. Metrics such as falling GDP, rising unemployment rate, and weak corporate earnings denote a bear market trend. Investor pessimism increase during a bear market trend. In general, if the trend is up for an extended period, it is often a bull market. If the trend is down for an extended time, then it is likely a bear market.


Bull and bear markets often coincide with the economic business cycle and a look at the typical expansion or contraction phase reveals a rising or falling stock market tends to develop several months or quarters ahead of an official economic peak or trough.


So, with the extreme volatilities and broad selling, is this a deep correction (10-20%), cyclical bear decline (20%-plus over a brief period), or a structural bear market (20%-plus over an extended time)?


Many of the listed US indexes remain in long-term structural or secular bull markets but are currently in a deep correction or headed toward cyclical bear declines. The primary difference between cyclical bull/bear and structural bull/bear markets is time frames. Cyclical bear markets tend to be much shorter, ranging from 3-6 months on average, but can sometimes sustain for as long as 12-24 months under unusual circumstances (i.e., Tech/Telecom bubble 2000-2002 and 2007-2009 global financial crisis). Secular and structural bull trends are from eight (8) to twenty (20) years.


Many OTC markets and high-end growth markets have suffered cyclical bear declines. However, the long-term structural/secular bull markets remain intact. Structural bear markets can also sustain for eight (8) to twenty (20) years. The typical cyclical bear decline tends to be sharp and abrupt, driven by exogenous or external events. For instance, the S&P 500 Index’s Feb-Mar 2020 pandemic panic sell-off resulted in a 1,201.66 setback or -35.41%, firmly placing it as a cyclical bear decline within the May 2013-present structural/secular bull market.

A deep correction and even a cyclical bear decline this year can set the stage for yet another mid-term election year cycle low.


Based on the monthly SPX chart, the technical conditions warn of further selling. The potential of a negative outside month (Jan 2022) and the failure of SPX to maintain above its 10-month ma (4,426) can lead to a decline toward fair market value at 3,656-3,715, coinciding with the middle of the 2009/2010 uptrend channel and the pivotal 30-month ma. If SPX declines toward the fair market value, this warns of -23% to -24%, placing it within the confines of a cyclical bear decline. The ability to find support here may hold the key to a capitulation/climatic bottom and the resumption of the May 2013 secular/structural bull trend.


Based on the weekly SPX chart, the recent correction is nearing critical support. The outcome of this test will determine the next directional trend. A broadening top/megaphone breakout during Jan 2021 negated the distribution top, confirming the resumption of the May 2013 structural bull. However, the 2021 rally created an overbought condition, prompting the recent correction. The extension of the top of the broadening top/megaphone trendline at 4,074-4,128 is critical support. Additional support is also visible at 3,815 or the 38.2% retracement from Mar 2020-Jan 2022 rally. The ability to find support here may contain the recent market sell-off allowing for a technical rally toward 4,526.5-4,610.5 (10-week and 30-week ma). Above this confirms the resumption of the secular/structural bull trend. A breakdown below 3,815 warns of a deep and more extensive sell-off toward the 50-61.8% retracement at 3,505/3,195.



Source: Charts courtesy of StockCharts.com

Source: Charts courtesy of StockCharts.com

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