Long-term bear markets have begun

Central banks and governments are stimulating economies for a reason. Whatever the reason, behavioural finance analyst Ken Norquay says, you too should defend your portfolio.


“Long-term bear markets have begun. Quit while you’re ahead” says The MoneyLetter’s behavioural finance analyst Ken Norquay.

In our last article, we promised to look objectively at the markets and NOT ‘curve fit’. Curve fitting refers to an analyst’s tendency to examine only the data that supports his/her view. The investment industry is dominated by the view that the market goes up most of the time, and has been doing so at just under 10 per cent a year on average over the past 100+ years. My articles provide a bit of technical relief from this bullish barrage by offering readers the bearish, cautious view. But, in this article, I am going to try my hand at curve-fitting.

Because the first day of the current bear market was Feb. 20, 2020, I will use the moniker ‘Triple Twenty Bear’. I will evaluate the Triple Twenty Bear by overlaying current data on two classic spike-tops of past markets. We will assess whether the same bearish scenario is unfolding following the 02-20-2020 spike top. The two classic market blow-offs are the 1929 US stock market and the 1980 gold crashes.

Following a spectacular move up, the stock market peaked on Sept. 3, 1929, and crashed 47 per cent to its low on Nov. 13. By Apr. 17, 1930, it had regained just over half of the decline and subsequently lapsed into a 27- month bear market. At the July 1932 low, the Dow Jones Industrial Average was only 11 per cent of what it had been at the top. There followed a spectacular rally of over 400 per cent in just four years. This was followed by another long drawn-out decline, which ended in 1942. It wasn’t until the early 1950s that the DJIA got back up to the September1929 high.

The second classic spike-top was the 1980 gold-silver blow-off. Gold had risen from its formerly pegged level of $35 an ounce to $850 in January 1980. By March, it had collapsed 41 per cent to $500 an ounce. Then gold prices regained 57 per cent of the loss, rallying to $700. Then came a long, drawn-out bear market that didn’t end until 1999, with gold around $250 an ounce.

The pattern is this: First: a long, strong bull market. Second: a very sharp short-term decline. Third: a big rally. Fourth: a long, drawn out bear market. This is the four-point model I will overlay on our usual markets. Does the current curve fit this classic ultra-bearish pattern?

US stock market

Following the longest bull market in US history (March 9, 2009 to Feb. 19, 2020) the long-term bear market has finally begun. The ‘long strong bull market’ of our model turned out to be the longest ever—the S&P500 Index rose 509 per cent in 10 years and 11 months. Then the Triple Twenty crash took back 44 per cent of that gain in only six weeks, giving us the “very sharp short term decline” of our model. That was followed by a big rally: so far, the S&P500 has regained 1040 of the 1200 points it lost. So far, the US stock market is ‘3 out of 3’ vs. our four-point model. If the model holds up, we should expect a long drawn out bear market to begin once the current short term rally stops. Because of the unprecedented monetary stimulus promised by the Federal Reserve, it is difficult to estimate when the current rally will end. But, when the current rally does end, the fourth stage in our model will begin: the long drawn-out bear market.

Canadian stock market

I was wrong about the TSX. I had thought that our market was less risky than the American market because it had not gone as high. The TSX Composite went up only 240 per cent from the low in March 2009 to the high in February 2020. But when the Triple Twenty bear began, the TSX dropped 38 per cent as opposed to the S&P500’s 35 per cent. And the Canadian market has only recovered 70 per cent of the decline vs. the S&P500’s 87 per cent rebound. However, the four-point Triple Twenty bear-market model is a perfect fit so far. If the overlay continues to hold up, we should expect a long, drawn out bear market in Canada, beginning any time now.

The bond market

US and Canadian long term bonds are making me nervous. When I apply our four-point crash model to bond markets, the first quarter’s wild gyrations in both Canada and the USA declare the top of a 39-year bull market. US treasuries peaked on March 9, 2020, then crashed 23 per cent to March 18. (Percentages quoted here are based on iShares Barclays 20+Year Treasury Bond (NASDAQ—TLT).) By April 21, prices had regained 80 per cent of the loss and the bond market moved into phase 4, the long, drawn-out bear market. I am reluctant to accept this conclusion because FED chairman Powell promised the FED would buy treasury bonds “without limits” to prevent a liquidity crunch. “Without limits” is a bold unprecedented promise. But, if Chairman Powell is following his sophisticated version of my simple four-point crash model, I understand why he is being so aggressive. Something is seriously wrong, Although Mr. Powell is not telling us what it is, his actions are speaking loudly and clearly. The long-term trend of bond prices in both Canada and the USA has moved from neutral to down.

The US dollar vs. basket of non-US currencies

The trend has been neutral since January 2016 when the US Dollar Index (DXY) completed a run from 80 (in 2011) to 100. The American dollar has swung up and down since then, and is currently at 101. Our crash model does not fit. The trend remained neutral right through the extremes in volatility witnessed in the first quarter of 2020.

The Canadian dollar vs. US dollar

Our four-point crash model does not apply. Yes, the Loonie did ‘crash’ when oil prices collapsed earlier this year, but that sharp drop was not preceded by a long up trend. And, yes, the loonie has regained 75 per cent of the loss. But these sharp moves are occurring in the context of a sideways long-term trend. Our ‘crash’ model defines the end of a strong up trend. The long-term trend of the loonie is neutral.

Oil prices in US dollars

Again, our four-point crash model does not apply to oil prices because it requires a long-term up trend first. For the record, the volatile action of Q1 2020 is more like a spike bottom than a spike top. We will examine this possibility in a future article. But, for now, let’s turn back the clock to 2008, when oil prices did have a spike top. Oil prices had risen from $25 a barrel in 2003/4 to $147 in July 2008. Then prices crashed to $36 a barrel in February 2009. By May 2011 oil had regained 71 per cent of the loss. Then began the long, drawn-out bear market where oil hit $6.50 a barrel earlier this year, amidst talk of a negative oil price. Oil’s spike top appeared in 2008. Now, 12 years later, oil prices might finally have reached the bottom. We will examine that possibility in a future article. For now, let’s observe that there was an extreme down draft in the price of oil from January 8, 2020, to April 21 followed by a 57 per cent rebound. And all this occurred in the context of a 12-year bear market in oil.


The current up trend began in December 2015 with gold at $1,062 US per ounce. It reached a high of $1,704 on Mar. 9, 2020, and then dropped 15 per cent in five days. Then, over the next month it gained back 133 per cent of the loss—and is still above the March high. It does not fit our four-point crash model. The long-term trend is still up.

Asset allocation strategy

Based on our curve-fitting technique, overlaying current data on past financial crashes, we should avoid both the stock market and long-term bond markets. Long-term bear markets have begun. “Quit while you’re ahead” is a good motto right now. Investors with defined benefit retirement plans should contact your pension fund department and tell them you want to switch your asset mix to the least risky of all investments. Do it before month end. These are not normal times.

Central banks are being super-aggressive for a reason. Governments are stimulating the economies aggressively for a reason. Whatever that reason is, you should defend your portfolio against it too.

Ken Norquay, CMT, is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: behavioural finance.

This is an edited version of an article that was originally published for subscribers in the June 2020/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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