During the 2007-2009 bear market, the highest level of bullishness occurred in January 2009. Yet the final low of the bear market was still two months away. Just because it feels like a bull market doesn’t mean it is a bull market, MktwHulbert writes.
That’s important to point out because of how bullish investors became in the wake of the U.S. market’s two-month rally off of its June low. Many declared that a new bull market had begun.
That is typically not the case. Instead, investors during bear markets usually experience many manic-depressive episodes, oscillating between despair and exuberance. They often are most bullish near the end of a bear market, not the beginning, and it’s when their late-bear-market enthusiasm is dashed that they throw in the towel for good.
Notice the pattern of higher highs and lower lows: Each of the 2007-2009 bear market’s several manic episodes was characterized by higher average bullishness than the prior one, just as each of the depressive episodes exhibited more despair than the prior one. As a result, the highest level of bullishness during the 2007-2009 bear market occurred right before the final low.
Read: The stock market typically bottoms before the end of a Fed rate-hike cycle. Here’s how to make that bet pay off. Not all past bear markets ended with a capitulation, but most did. In a recent email, Jack Schannep, founder of TheDowTheory.com advisory service, said that based on his proprietary measure of capitulation, the ends of “the last ten bear markets have been signaled by” capitulation.
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