A client writes: “Thanks as always for being our jury, Clif, and weighing the evidence. As prosecuting attorney for the Bears, I wish to point out some prima facie evidence of past bear markets and past vicious corrections. Bad news revealed was causal identification for a bottom (LTCM/Russia), while the lack of bad news identified a bear market. Unless the attorney for the Bulls can produce some very bad news very fast, this prosecution will rest.”
My answer: I agree that major bottoms should ideally be accompanied by bad news, or by some catastrophic event. One thing that bothered me about the late August low was that at no time this summer did the percentage of AAII bears exceed 41%, and that was way back in July. A major low should see somewhere in the neighborhood of at least 50% bears or more (preferably more). It’s almost as if individual investors are still too complacent.
And yes, I agree that the news could, and probably should, be a lot worse (China notwithstanding). At the very least we can say that the market’s intermediate-term trend is bearish. This is confirmed by the interim trend indicator as well as by the NYSE intermediate-term internal momentum indicators.
One could even make a preliminary case that the long-term trend has turned bearish, if you look at the 200-day MA and some other indicators. I believe in giving a secular bull market every last benefit of the doubt, however, so I haven't officially pulled in my horns on the longer-term trend. I may be forced to do so, though, if things don’t improve in October.