Commentary: Paul Ebeling on Wall Street, The Bulls Vs The Bears


The Bulls Vs The Bears

Note: “Big Bear markets end in despair and hopelessness, which many current Bulls will discover at considerable cost to themselves” — Mark Lundeen

Be very wary of any advance from here, as it may prove to be what we once called a Dead-Cat Bounce

A Dead-Cat Bounce is a tradable correction in a Bear market, a trade that 1 gets into knowing it will not last long. 

But for most retail investors a Dead-Cat Bounce is the Bear’s siren song to lure them into his meat grinder one more time, as no Bear market ever ends with a Dead-Cat Bounce. 

One of the most influential market commentators of the 20th Century was Richard Russell of The Dow Theory Letter. 

A brilliant-market insight of Mr. Russell’s was on the psychological make up of Bull and Bear markets. 

Mr. Russell observed how both Bull and Bear market evolved in 3 stages as the stock market moved from one psychological extreme to the other, despair to euphoria in Bull markets and from euphoria to despair in Bear markets.

The following are from my takeaway of Mr. Russell’s comments on the evolution of Bull and Bear markets 11 yrs ago. 

Bull Markets

Stage #1 of a new Bull market begins at the absolute bottom of the old Bear market, where market sentiment at the bottom of the Bear market is bleak, with no hope of things ever turning around.  At this point where things absolutely cannot get any worse, they begin to get better; and a new Bull market is born, though most former-market participants, battered and bruised by Mr Bear do not believe it. The last time that happened was on 9 March 2009 precisely at 1:00p ET.

In Stage #1 of a Bull market valuations are fantastic. During the prior Bear market companies with weak balance sheets or business plans were eliminated, leaving the list of survivors from Mr Bear’s program of market cleansing winners.

In Stage #1 of a Bull market, no one is going to hold an investor’s hand to reassure them of the wisdom of buying at the bottom of a Bear market, as psychologically most remain mired in the former Bear market. 

To most of the financial world, still mired in bear-market psychology, buying stocks is NutZ.  But in Stage #1 of a Bull market dividend yields are very competitive, if not superior to what banks and the bond market are offering.  So, early Bulls are well paid until market valuations begin to inflate again.

Stage #2 of a Bull market comes at the point where investors slowly return to the market, and increases steadily as market valuations increase and dividend yields decline.  Corrections in the early stages of a Bull market can be sharp, inspiring fear that the Bear is again at the door, but is not.  Stage #2 is the longest period of a Bull market as it advances with little excitement or broad-public participation.

Stage #3 of a Bull market is exciting with broad-public participation as the stock market feels like a safe place to place for investors to hold their hard earned cash in.  Investor returns in inflationary-capital gains far exceed what a bank or a bond has to offer them, so the stock market really is the place to be.

But, market valuations in Stage #3 ultimately increase to the point of being silly as dividend yields decline from where they once were.  But few care about dividends, as everyone now realizes market valuations 2X’s every few years and all market declines are excellent buying opportunities.  This continues until things cannot get any better, and it is at this point that a new Bear market is born.

Bear Markets

Stage #1 of a Bear market begins looking and feeling exactly like the stage #3 of the prior Bull market.  But most investors are slow in realizing the change in the marketplace. Where market declines were once buying opportunities aka Buy the Dip, the market has now evolved to where market advances become opportunities to sell.  Though in Stage #1 most investors fail to use these selling opportunities to take profits and they suffer for it.

Stage #2 of a Bear market sees diminishing public participation in the stock market as market valuations deflate and dividend yields rise.  Then investors accept their losses as they exit, promising to never again invest in the stock market as they leave.  Though there are still some who believe the bottom is in, and have faith the Bull market and good times will once again return, and it will

Stage #3 in a Bear market is noted by the total collapse in investor confidence, and despair that the Bear market will never come to an end.  The stock market becomes an object of ridicule as investor sentiment becomes despondent as dividend yields rise to something over 6%.  And so it goes, until once again a day comes when a Bull market is born on Wall Street a instant that few notice.

There are trillions on the sidelines, just waiting for that moment to enter.

So, pay attention, this is a Presidential election year, and the President will do what it takes to be reelected.

Here are 3 stories related to this market.

People are Asking, “What is going on in this Stock Market?”

Rates Cut to Zero, Fed Launches $700-B QE Program

Again, remember, it is your money and so, your responsibility

Have a healthy week.

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