There’s an old market saying that notes that bear market rallies can often be better than the real thing, suggests Mary Anne and Pamela Aden, editors of The Aden Forecast.
That was certainly the case in the Dow’s recent upmove, which has been a classic case of a strong bear market rally. And the key here is the bear market. The stock market has been bearish all year and the bear market remains in force. This means stocks will be headed lower, once this rebound rise is clearly over.
So how low could stocks go? Going back through history, the average drop is 56% for a stronger bear market. So far, the current bear has the characteristics of a stronger decline. If that proves to be the case, then stocks could possibly fall another 20% to 30%.
Reinforcing this view, the current bear market has followed the down moves in the two previous bear markets. In other words, they’re not exactly the same, but close enough. And based on the similarities, there’s more to go on the downside.
This is also being reinforced by the Nasdaq. It's been declining and it’s essentially been leading the way for the other stock indexes. It’s been the weakest, but most impressive is its leading (long-term) indicator.
Note, it’s heading down to the major low area. The current down move is on track to replay the 2008-09 experience. This is yet another indication that this bear market is more likely to be a big one rather than a moderate one.
It’s also interesting to see that margin debt is coming down. This also reinforces the bear. How? Margin debt is debt that’s used to buy stocks. Normally, when stocks are going up, investors become more confident. So they borrow money to buy more stocks.
Margin debt hit a record high in October 2021, but it’s been coming down since then. This is typical behavior during bear markets. It happened in 2002, 2009 and in 2020.
Investors get nervous about declining stock prices and they unload their debt, and stop borrowing. And as you’d expect, margin debt falls along with the stock market. That’s what we’re now seeing this time around as well.
The stock market remains bearish. But the rebound rise moved higher before it stalled out, and stocks will be headed lower once this rebound is clearly over. For now, stocks are still very expensive and the leading indicators are reinforcing the primary trend is down. This means we’ll continue to play it safe and stay on the sidelines for the time being.