Big bear or little bear?

If you look at Wall Street you'll begin to remember that line from Play School: "There's a bear in there." But just how big is the bear? Is it small, in which case things will turn around within the next few months, or is it big?

Have a look at the following two graphs from BBC Market Data. Here's the first:


This is a graph of the three month performance of the S&P 500. I've chosen this index over the Dow Jones Industrial Average because I understand it to be a more accurate indicator of the US stock market as a whole. The Dow Jones can fluctuate quite wildly and its growth or decline is not necessarily an accurate picture of the whole. The S&P 500 isn't either, but it's more accurate.

As you can see from this 3 monthly graph, the recent stock market drop has been impressive. It has wiped out any gain that it has had over the last three months. Importantly, the drop is precipitous, like a cliff, which indicates panic.

However, look at this graph, which should put things in perspective:


This is the performance of the S&P 500 over the past twelve months. You can see the "cliff" on the right hand side, but notice that the index has been performing consistently well for some time, and that the current drop puts the index back to late November. It's worth realising that the highest the S&P has ever got was 1500.64, which was achieved on 22 March 2000, so it has been nearly 7 years since it has been up around the heights it has been recently (which looks to be 1460).

However, the drop is still precipitous - it is still a cliff, and nothing in the last 12 months comes close to such a drop off. It's too early to determine whether the bear is big or small, but it seems that, so far, a big bear can't be ruled out.

In order for a "Bear Market" to be officially declared means that this index must fall at least 20% from its high over the next two months. If we assume that the S&P hit 1460 as a high, then if it is 1168 or lower by early May, then the bear is there.

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