Patterns in a bear market – What’s a good entry point? With all of the recent chaos in the markets I’ve decided to take a look at past corrections & recessions to make note of any patterns that could help us navigate with our portfolios mostly intact. It’s certainly not the moment to be dumping lump sums into the market if you need to access it within 1-3 years, but the aim of this study is to find out what would be the best moment if you were to invest a larger sum when looking to achieve the best returns while keeping risk to a minimum. Here’s a low effort meme of a bear, because this page was full of text so it looked a bit ugly. Notes: While the textbook definition of a bear market is a 20% or more drop after going through some of these corrections & recessions, I realized the markets tend to go through multiple significant corrections within a business cycle and I will refer to them as short-lived bear cycles as the volatility doesn’t typically last long and the macroeconomic outlook isn’t as bleak. Recession on the other hand seem to happen once macroeconomic outlook deteriorates at the end of the business cycle due to various factors. I’ll refer to these as long-lived bear cycles. I will be using 50, 100 & 200 weekly & daily EMAs and technical analysis for this study. For newcomers, EMA = Exponential moving average. Check Investopedia for more info on technical indicators. You’re probably wondering why you should even care about imaginary lines, moving averages and all of that instead of DCA (dollar cost averaging), buying diversified ETFs, looking for undervalued companies etc. Well, you should care, because this is what the big funds and pretty much everyone else is looking at right now. “Imaginary lines stop being imaginary if everyone believes in them.” Furthermore, I am in no way saying that fundamental research, DCA or buying ETFs is bad. All I’m saying is that this period we are entering is predominated by a weak macroeconomic outlook with very few possible bullish catalysts and increased short-term volatility as rising rates make it difficult to correctly value companies or industries. There’s a separate document on the short to mid-term macro-outlook. With that being said let’s jump into it. First part of the case study is what I’d consider to be short-lived bear cycles: Hello “2014-2015 commodity shock”, “2018 rate hike panic” and “Covid crash”. S&P 500 – The 2015 commodity shock I actually wasn’t trading back then so I don’t fully remember this event from an investment perspective, but the main factor driving it was an increase in the supply side during a period of relatively low inflation. Perhaps the most interesting note from this image is the first fake reversal sign where the S&P rallies above the 50D EMA (the purple one) only for another drop to occur. That being said the second rally above the 50D EMA was successful and a period with relatively few significant downturns followed. While I found no indicator to reliably determine the bottom, both reversal signals offered great 2-3 year returns with limited downside. I’ll be going into more examples to show why rallies above the 50W or 50D EMA are good buying signals so just bear with me for now. “It's not about buying the bottom; it’s about buying as close to it as possible.” S&P 500 – The 2018-2019 Trade War & Rate Hikes Now this is a period I remember quite well. Let’s just say that the US didn’t have the most amazing leadership back then. I don’t want to get political. I don’t care about politics in the slightest bit. The selloff was initially driven by tightening monetary policy, but that was further exacerbated due to the US-China trade war that was started by Trump for no good reason. Honestly the measures used ultimately only pushed extra costs onto the consumers while accomplishing absolutely nothing. The initial selloff paused after the 50D & 100D EMAs did not invert, but another selloff took place after the escalation of the trade war. The selloff started to reverse after the Fed decided to temporarily reverse monetary policy. It would seem that the inversion of the EMAs could be a reliable indicator for the bottom, but if we look at the previous example, we can tell that it isn’t very reliable in the case of sharp selloffs. The rally past the 50D EMA was again the turning point after which the market started to rally with only relatively small downturns (which I would just consider typical market variation). The rally past the 50D EMA was a great buy signal if we’re talking 1 year returns and that follows the previous example. The next one I’m not sure anyone could’ve predicted, but if you were working in a scientific research role or perhaps in the medical sector then maybe Covid-19 turning into a pandemic could’ve been somewhat predictable and a reason to lock in some profits following the rebound from the trade war. S&P 500 – The 2020 Covid Crash This is the period where I got away with a lot of bad investments thanks to the rally prior to 2020. It was also the period where I’ve managed to lock in the most profits and funny enough the most losses as well after having to cover a short position around late March. The long story short is that I got way too greedy after shorting the bear market rally at the start of March and riding that close to the bottom. I couldn’t believe the market was rallying in such economic conditions, but boy was I wrong. It’s the single event that has humbled me and likely changed my entire approach to risk assessment. I had no way of figuring out the bottom and even looking in hindsight I still can’t find a reliable indicator. I covered the first short position when I thought the profits were good enough. The reasoning behind opening the second short position was that I thought most companies were still overvalued particularly in the tech sector so we were likely in another bear market rally. Had I fully understood the power of QE alongside low inflation I would’ve know that investors were willing to pay much higher premiums for growth stocks. I still don’t get the idea behind the valuations of certain loss-making companies, but I’ll let it slide for now. “The market can stay irrational longer than you can stay solvent.” This was the first time I experienced it and it was my most expensive lesson. The only reason I’m still in the markets is due to some well-timed investments in the basic materials sector that were basically trading for free so I used them to hedge against that other completely stupid position. Going back to the technical analysis side of things this example follows the consistent pattern of the rally past the 50D EMA (following the inversion of EMAs) proving to be the turning point that fuels the next bull cycle. While theoretically considered a recession due to the two consecutive quarters of negative GDP growth I’m more on the lines that this crash followed the same pattern seen in a shorter bear cycle with a sharp and fast rebound. In order to put all of this in a bit of perspective by looking at these short-lived bear cycles the common pattern is that the rally past the 50D EMA seems to be the signal for the resumption of the bull cycle. It isn’t the best point to buy, but I’ve found no reliable way of predicting the actual bottom so perhaps looking out for a simple indicator is the way to get as much value as possible while taking as much risk off the table as possible. Moving on I want to go into the weekly charts and take a look at the Great Financial Crisis, the Dotcom bubble & another unexpected surprise to hopefully figure out how it relates to the current situation in the end. Hopefully you’ll understand why I’ve thrown in the Covid Crash alongside the corrections. S&P 500 Short-lived bear cycles on the weekly chart The last key observation I’d like to make is that in the previous 3 cases the 50, 100 & 200W EMAs never crossed over although they came pretty close to it in the Covid Crash. You’ll see later on that this pattern isn’t the same during drawn out recessions or long-term bear cycles as I would consider them. The 200W EMA provided support in all 3 although it isn’t such a very reliable indicator during the Pandemic Crash as you could’ve been convinced that we’re headed into a much more drawn-out bear cycle. S&P 500 The Great Financial Crisis of ‘08 One of the most devastating events in financial history, probably one of the reasons I became interested in economics and probably one of the reasons I’m not entirely right in the head having grown up in this period. I considered it was pointless to include the daily chart for this period as the daily variation and volatility was so high that daily EMAs are completely unsuitable to be used as entry signals. A key difference from the previous short-term bear cycles is that the weekly EMAs actually invert this time. In this case the first crossover between the 50 & 100W EMAs actually occurs at the top of the first bear rally while the second crossover between the 50 & 200W EMAs occurs right prior to the steepest drop. I don’t think there’s an indicator to predict the exact bottom and maybe trying to actually find it, while dealing with very high short-term volatility isn’t worth losing sleep over. The more consistent trend is that, following the inversion of EMAs, the 50W EMA signals the rally that ultimately ends up putting an end to this bear market and bringing markets into the age of tech & growth stocks that might’ve ended or at least paused as of writing this. We haven’t quite gotten to the conclusion so hang in there. Another key note was that, in the initial bear rally, the 200W EMA acted as initial support & had that level of support not been broken this would’ve only been a short-lived bear cycle. The reason it failed had nothing to do with the support level and everything to do with the unaddressed systemic risks present in the markets at that point in time. S&P 500 The early 2000s Dotcom Crash Going further back in time, while I was way too young to notice any impact of the Dotcom Crash, looking back on it and hearing or reading about it from the perspective of investors that were actually in the markets at that point in time led me to believe that it was a period that’s similar to what we’ve experienced during the post Covid-19 bull cycle up until the start of 2022 though it isn’t exactly identical. The Dotcom Crash was the result of a speculative bubble as internet adoption started to grow. If anything, it reminds me of the 2018 crypto market crash or the current crypto market crash of 2022 where expectations far outweigh the actual progress that developers can make while working on a project and when those unrealistic expectations aren’t met everyone’s reaching for the exit. Not to mention the Dotcom bubble featured similar behaviors such as the blatant scams floating around the current crypto ecosystem. The other difference from the current 2022 crash is that other than too much leverage in financial markets the macroeconomic outlook was a lot better looking. There wasn’t a supply chain disruption and inflation while above the Fed’s 2% target didn’t climb higher than 4%. The interest rate hike wasn’t even that much to be honest, but it doesn’t take much to wipe-out an overleveraged portfolio. Going back to the technical side this was a much more drawn-out bear cycle involving gradual deleveraging. A key note is that the inversion of the 50 & 100W EMAs as well as the 50 & 200W EMAs occurs during the peak of bear market rallies. Again, I felt it was completely unnecessary to include the daily chart as daily EMAs are unsuitable to be used as buy signals as they give too many false signals. On the other hand, we’re seeing the same pattern where (following the inversion of weekly EMAs) the rally past the 50W EMA is the rally that actually puts an end to the bear cycle and brings forth the next bull cycle that lasts until ’08 when banks suddenly decide it’s a good idea to mess around with markets and start selling mortgage-backed securities. Quite honestly selling them wasn’t even the worst part, the worst part was that they were sold with a buyback clause without taking the bank’s available liquidity into account. Most of them were structured in a way that it was unlikely for all the loans in that package to default so the most likely outcome would’ve probably been break even or a small loss, but tell that to an investor that wants safe returns and they all start losing their minds. “If you want safe returns, you buy government bonds and nothing else.” S&P 500 The icing on the cake – The early 1980s Recession Now this one I wasn’t even born when it happened, but after reading about it, I realized it ticks so many of the boxes that can also be seen in the 2022 bear cycle. Rising interest rates (check), Double digit inflation (no, but we seem to be getting there), energy crisis (check), stagflation (check), basic materials crisis (check). Depending on how you view it the aftermath of this bear cycle was what resulted in a policy shift from Keynesian economics to the current neoliberal system, which then brough us: vast technological improvements, automation to replace workers so you don’t have to pay as many, unaffordable housing, better healthcare so we can keep raising the retirement age, depression among the young population, climate change and record stock market returns. While I do invest in the markets, I’m also quite realistic about certain issues this new era has brought and it isn’t unlikely that some fundamental changes are going to have to take place either after this bear cycle or the next one. Only thing I hope is that it isn’t going to be something along the lines of: “You will own nothing and you will be happy.”, because that’s really counterproductive to most of us in the markets. I seriously doubt there’s going to be anyone reading this that’s part of the top 0.1%, which is where the actual wealth is heavily concentrated. Back to the technical analysis side of things this bear cycle behaves similar to the other long term bear cycles we’ve looked at. The 50 & 100 EMA crossover corresponds to the peak of a bear market rally and the 50W EMA acts as a signal for the rally that ends the bear cycle following EMA crossover. A key note is that the 100 & 200 EMA touch, but do not crossover and I believe that’s one of the reasons there’s more confidence in the rally. Would be interested to know how advanced charting was backed then. I’ve always wondered if people follow imaginary lines because everyone believes in them or if imaginary lines predict the psychology of the masses. We’ll probably never know. Conclusion to all of this: Well, if you’re someone from r/wallstreetbets or anything similar you probably skipped straight here. To everyone else thank you for making it this far & I hope it’s useful. I’ve had a look at the most recent short-lived bear cycles or significant corrections and their impact on the S&P 500 index. The key pattern I’ve noticed is that following the crossover of the 50, 100 & 200D EMA the market finds a bottom at which point the rally above the 50EMA is the rally that ends the bear cycle. While you can’t predict the bottom, that signal represents a very good entry point over a 1-to-3- year period. It’s a common theme for these bear cycles to find their support near the 200W EMA levels. If that support level breaks or becomes resistance after a bear market rally the bear cycle is extended. With recessions or long-lived bear cycles the macroeconomic outlook is often weak (high inflation, an energy or basic material crisis, rising rates, political turmoil etc.) with few possible bullish catalysts, which is what fuels the selloff alongside investor psychology. It is risky to look only at the 50D EMA for an entry signal once weekly EMAs have started to converge and the 200W EMA support level has been breached and if the macroeconomic environment is one as described above. Predicting the bottom is again almost impossible, but the rally past the 50W EMA is again the rally that ends the bear cycle and is probably one of the best buying points over a longer 8-to-10-year period. I cannot predict the bottom, but while the bottom is exactly the best time to buy it also forces you to deal with short term volatility. The 50D EMA or 50W EMA signals in the cases of short-term & long-term bear cycles respectively offer just as good of a buying opportunity. While the prices paid will be higher, the overall risk of a bear market rally is also lower and there is the added benefit of not having your capital tied up in a position that is neither capital nor time efficient. “It’s not about the max % gain, it’s about the time saved.” S&P 500 14th Jun 2022 – the current state The daily chart: To start off, in 2022, the macroeconomic uncertainty is definitely there with the Zero-Covid policy in China causing supply chain disruptions, Russia’s invasion of Ukraine, the subsequent rise in energy prices, the rise in food prices and risk of famine across the Middle East & certain regions of Africa that relied on Russian or Ukrainian imports of wheat, inflation nearing double digits in the US and other developed countries alongside rising interest rates and quantitative tightening. Speculation wise most of the tech/growth sector reached bubble valuations prior to the spike in inflation and subsequent start of the bear cycle. Crypto reached bubble valuations as well and housing doesn’t really seem to be slowing down much even though rising rates are going to increase the costs of servicing mortgages. I don’t quite believe we’re at fair valuations (with a few exceptions in some industries and some markets), but that’s exactly what I thought last time so this time I’m going to be patient. I believe this bear cycle will likely be a drawn out one similar to the recessions I’ve looked at. I’m not quite sure if it’ll fit the textbook definition of a recession, but the current state of things is making me think that the rebound will likely take longer than expected. On the technical side the 50D EMA acted as resistance for the first bear rally; in the second bear rally it acted as a false signal leading to a bull trap; in the third rally it acted as resistance again and the 50, 100, 200 EMAs have now crossed over into bearish territory. This is following the patterns observed during longer bear cycles where daily EMAs are inaccurate and we thus need to look at the longer cycles. S&P 500 14th Jun 2022 – the current state The weekly chart: Looking at the weekly chart we can see that we haven’t yet breached or tested the 200W EMA support level, though I believe we will do so in the next weeks. I cannot say for certain whether this is different from the Covid crash. If the support holds & there is a sharp rebound, we’d be looking back at the 50D EMA signal as an entry point. That being said if the macroeconomic outlook does not improve at that point in time the rebound will turn into a bear market rally. If the support breaks, then we are waiting for crossovers between the weekly EMA and then the rally past the 50W EMA would signal the end of the bear cycle. To follow it up even though I’ve done most of this research using the S&P 500, I did have a look at the Nasdaq, which is more tech/growth focused while the S&P 500 does have a few more value components. The Nasdaq has broken the 200W EMA support level and it supports the longer-term bear cycle with the rally past the 50W EMA likely being the one that ends the cycle after weekly EMAs have crossed over (it hasn’t happened yet). Nasdaq 14th Jun 2022 – the current state The weekly chart: Not too distinct from the S&P as they tend to be pretty highly correlated, but most volatility has been in the tech sector which forms a much larger % of the Nasdaq index. Additionally, there is the chance that some of the current macroeconomic issues will take longer than expected to improve and once the markets reach cheaper valuations it’s possible that value could outperform growth in the next bull cycle and that we’ll see a decoupling. Right now, most equities have been pretty heavily correlated in the recent drop. As a sidenote this is something I noticed during the Covid Crash. When markets drop it doesn’t matter if you’re holding companies with P/Es of 5 or P/Es above 100 as they all fall together. The only difference is that the cheaper ones tend to produce incredible returns following the rebound. When looking at the Nasdaq, Weekly EMAs are much closer to crossing over compared to the S&P so, right now, it reinforces the outcome of a longer bear cycle with the rally above the 50W as the signal before the end of the bear cycle and the start of the new business or bull cycle. The key takeaways: If you’re buying the bottom or at least where you think the bottom is I think it’s worth taking a few profits off the table if the macroeconomic outlook remains the same and market sentiment switches from fear to overly optimistic within a matter of days. If you’re drip feeding into the market then these short-term variations shouldn’t impact you as you’ll be buying at all points throughout this. I’m personally looking to invest a larger sum and that’s why I decided to write this as it helps me understand my own process a bit better and hopefully it helps someone in the same situation. “When you think you’re the King of the world and you’re a genius at predicting movements close your positions.” Thank you for reading this. I will be releasing the first month of content for free. Anything after that will be available via Patreon for the price of one beer. https://www.patreon.com/MikeMoney As of now, it’s going to be in written format. I may consider video content depending on feedback. If you found this or anything else useful, please consider supporting me so I can spend more time looking at markets and provide insightful market analysis instead of pretending to work, while I actually look at corrections, recessions and draw lines on graphs. Please like and share the Facebook page as well https://www.facebook.com/Mike-Money- 107908541957888 Disclaimer: This is not investment advice. The market is volatile and full of risk.