Bear Markets Retrace the Previous Bull Market

There was an interesting quote in Barron’s Magazine this week in Kopin Tan’s column about how to judge when a bear market is coming to an end.

“Mega bear markets typically do not end before they retrace substantially more than 100% fo the bull market that precede it,” warns Andrew Burkly, Brown Brothers Harriman’s technical analyst.

And at 735, the S&P 500 is just slightly below the 768 starting line from which the last bull market took off in October 2002.

This theory that bear markets take back most of the previous bull market has been supported by history over the past 100 years.

But there’s something a little odd about Mr. Burkly’s reasoning.

He claims the last bull market started in 2002.

Really?

History of Bears and Bulls

Over the last 100 years, the American stock market has seen numerous bear and bull markets of different lengths.

The average bear markets lasted anywhere between 11 years and 26 years.

If Mr. Burkly is correct about his calling of a “bull” beginning in 2002, then the “bear” market of 2000-2002 lasted a mere 3 years.

That short of a bear market would be unprecedented historically.

But let’s say, for argument sake, that he is correct.

The bull then began in 2002 and ended in 2007.

Short Living Bulls?

That short of a bull market has happened before.

1898-1902 (5 years) saw an average return of 15.6%
1922-1929 (8 years) saw an average return of 25.4%

Are We Still in the 2000 Bear Market?

A more believeable explanation is that we’re in a long-term bear market which started in 2000 and continues. The “rally” from 2003 to 2007 was simply a bear market rally- which other bear markets have also seen.

If true, and still following Mr. Burkly’s theory, then the markets need to retrace to the start of the prior bull market- which began in 1983.

That is somewhere around Dow 700.

Could we see that kind of pullback this time?

Scarily enough- yes.

And it will likely take us decades to retrace the Dow 14,000 and NASDAQ 5,000 levels.

Mr. Burkly has it technically right. But the low is much, much lower than he’s predicting.

Be prepared.