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Is the Bear Market Hibernation Over?

December 3, 2018

The popular television series “Game of Thrones” has a famous saying – “winter is coming.”

 

In the show, the phrase is a warning that tough times lie ahead, and cautious preparation would be a wise course of action.

 

Well, when talking about financial markets, it looks like winter is coming.

 

Historically, harsh, painful bear markets follows long bull markets. We’re more than 156 months into one of the longest bull markets ever, but as I’ve written before, the party won’t last forever.

 

Data from earlier this year show that when the Dow Jones Industrial Average closed above a 52-week high, most stocks in the index were below their 200-day moving averages. That means the gains in the index are being fueled by a small number of companies. For September and October, it was Apple and Microsoft.

 

Over time, these kinds of conditions often lead to bear markets.

 

In a healthier market situation, we’d see several companies driving the growth, not just a handful or less. When just a fraction of the companies in the index continue their growth, while others lag, it’s a sign of bad times ahead.

 

Further supporting data can be seen in price-to-earnings (PE) ratios. The median trailing PE ratio for the Russell 2000 Index, a standard performance measure for small-cap stocks, has only been higher six percent of the time in the last 20 years.

 

While it’s true nobody can predict the future, we have decades of data telling us that winter is coming.

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