The Bear Is Getting Ready to Take Another Swipe

The second stage of this bear market will be brutal.

Of course, most folks are skeptical we’re even in a bear market. That’s understandable.

After all, the S&P 500 has recovered nearly everything it lost during the February-April decline. The index is within spitting distance of a new all-time high. So we can’t blame anyone for thinking stocks can only go up from here.

Except…

We know this is what bear markets do. The first rally phase in a bear market is designed to punish bearish traders who’ve held on to short positions for too long, and then coax reluctant bulls back into the market.

In other words, it makes folks question if we’re even in a bear market at all.

Then, the bear takes another swipe.

We don’t have to go too far back in time to find evidence of this action. Think about the bear market that occurred in 2022. Here’s the chart of the S&P 500 from back then…

The S&P 500 peaked in early January 2022. It then suffered its first decline phase – falling 16% in two months.

We then got a stunning, “V” shaped rally. The S&P recovered most of its first phase decline.

V-shaped rallies are dangerous. Investors who sold at the bottom regret their decision. They buy back in at higher prices. And, this time, they vow not to get “bluffed” out of positions on the next decline because apparently, stocks only go up.

During the second decline phase, these investors hold onto their stocks and endure larger losses because they’re convinced they made a mistake selling the first time around.

It takes a larger downside move to convince these investors otherwise. That’s why the second stage of a bear market is often the largest decline phase.

It happened in 2022. And, for reasons we’ve written about here in Market Minute over the past two weeks, it’s about to happen in 2025 as well.

Could I be wrong?

Absolutely. Maybe the stock market will keep pressing higher and the S&P will make a new all-time high in the days/weeks ahead.

But, if I am wrong, since the market is already in an extended condition – with the various moving averages expanded far away from each other – we’re not going to miss out on a huge move higher. There’s not much fuel remaining for that sort of a move.

If I’m right, though, then the next move lower could be significant.

This is not the sort of environment where it makes a lot of sense (at least to me) to pay 23 times earnings to buy the S&P 500.

Best regards and good trading,

Jeff Clark
Editor, Market Minute

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