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Stealth Bear Market?

A bear market occurs when broad market indexes such as the S&P 500, New York Composite Index, and the Nasdaq Composite Index experience a decline of 20% or more from their recent highs. Previous bear markets tend to be accompanied by an economic recession, a credit/banking crisis, or an exogenous event. For example, two of the worst bear markets in the past 100-years coincided with the 1929-1932 Great Depression (-83% bear over two years) and the 2007-2009 Global Financial Crisis (-57.69% decline over one-a-half years).

During the 2020-2021 COVID-19 pandemic and the subsequent global shut-down, SPX plummeted 35.41%, triggering the 20% threshold. However, the rebound and the central bank's monetary and fiscal stimulus programs led to a V-type rebound and the resumption of the bull market. Based on the above definition of a bear market, the brief 1-month Feb-Mar 2020 sell-off fulfilled the bear market category. However, the speed of the rebound (v-type bottom) and the ability to record new all-time highs quickly negated the bear market, leading to the resumption of the primary bull market.

Optimism, economic strength, and risk-taking fuel bull markets. Pessimism, economic weakness, and risk-aversion power bear markets.

Although most bull or bear markets depend on the state of the economy, investor/consumer sentiments, and the degree of optimism or confidence, the direction of the stock market trend is equally important. Even though many stock market indexes may not be trading at official bear market territories, the weakness below the surface or the market internals are deciding factors in a bull or bear market.

Since many individual stocks have declined 20% or more, are we in a stealth bear market?

A review of popular indexes such as SPX, INDU, OEX, COMPQ, and NDX suggests many stocks within the respective indexes have already plummeted well below its 20% bear market territory.

The technology-laden Nasdaq 100 Index (NDX) shows 66 stocks within the index with losses and 34 names with gains for the past year. The average 1-year loss is 8.75% and -16.49% on a year-to-date basis.

The S&P 100 Index (OEX) has fared better, with 55 losers and 46 winners for the trailing 1-year period. The average 1-year return is +3.05% and -8.26% year-to-date.

The Dow Jones Industrial Average (INDU) is interesting as the narrow-based blue-chip stocks are split evenly between 15 Dow stocks with gains and 15 Dow stocks with losses for the past year. The average return for the 30 Dow stocks is 1.46% and -5.25% year-to-date.

If you are an optimist, the above statistics suggest the bulk of the selling is behind us. Recent broad and robust selling in tech-laden and growth names signals a mean reversion in the marketplace where investors shift from growth and tech stocks toward value areas.

If you are a pessimist, the above suggests further selling is necessary because selling needs to go full circle before achieving a sustainable market bottom. Perhaps the stealth bear market is no longer as quiet as before. Will winning stocks, safe-haven, and defensive stocks also sell off?

Source: Chart courtesy of

NDX Index Source: Chart courtesy of

NDX Source: Chart courtesy of

NDX Source: Chart courtesy of

OEX Source: Chart courtesy of

OEX Source: Chart courtesy of

INDU Source: Chart courtesy of

INDU Source: Chart courtesy of

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