A Father/Son Conversation About Bear Markets

Son: Hey, dad. How do bear markets get started?

Father: Well, son, after stocks have been going up for a few years they then go sideways for a while. While they go sideways, the price and its moving averages begin to converge. At the same time, markets begin to diverge from one another.

Son: What happens then?

Father: Well, stocks begin to rollover, going down in a rather gentle manner.

Son: Why is that?

Father: You see, son, investors are still big believers in the bull market. So, when the price starts to go down they don’t believe it will go much lower. In other words, they are complacent at the start of a bear market.

Son: Is that what is happening now?

Father: No, not exactly. Yes, stocks did go sideways for a while. So that part of the story is true to form. But the moving averages have not crossed, nor has the longer term moving average, its 200 day, which has yet to roll over and point downward. Also, when the sideways action was occurring, very few divergences emerged between markets, and those that did were very minor.

But that’s not the big thing.

Son: No? What is?

Father: Bear markets are sneaky. They start out with disbelief as they gently rollover. Kind of like a sleepy bear waking up from his long winter nap.

Son: Well, dad, that doesn’t sound like what I see on TV today.

Father: No, son, it isn’t. What you see and hear today is fear. And fear is not how bear markets start out. Fear is a characteristic of bull market corrections and end of bear markets, not at their sneaky, sleepy starts.

Of course, this is way bear markets have happened for more than 50 years. So, maybe this time is different. But you know what they say about that?

Son: No, dad, what?

Father: The four most dangerous words in the investing vocabulary is “this time is different.”

Son: Thanks, dad. You’re the best!