Warning! Bears crossing ahead
Despite stock gains in recent weeks, some longtime market watchers believe the bear market is still alive - and that investors lulled into complacency could lose much of their portfolios.
Stock technicians and numbers crunchers call it a "bear trap" - an unpleasant circumstance where you don't trap the bear, but the bear traps you, the investor.
"In the 1973 downturn, prices just kept going down," says one longtime mutual fund expert. "But then they would rise again, and you'd put fresh money in the market, and you'd be rewarded by watching your stock go back down and down and down, taking your new money with the old."
That period brought at least three "up" rallies, in which the market seemed to be correcting and moving higher, only to take newly optimistic investors back down again.
Bear traps also occurred in the 1929 crash. After the initial crash of November 1929, the market rose in early 1930, crested in mid-April, then tumbled, hitting bottom in summer, 1932. Share prices didn't return to 1929 highs until the mid-1950s.
In the 1980 gold-market collapse (after gold had soared from $35 an ounce in the early 1970s to more than $600 an ounce) prices fell sharply, rose briskly, then fell again. Investors who jumped back in during the rally and stayed fully invested lost over half of their portfolio.
That's why some analysts worry about the current market gains. "We may not be out of the woods yet, argues James Stack, who publishes InvesTech, a market newsletter.
"If this is a bear market trap, it is a classic one," he says. Mr. Stack wonders whether the challenges that led to the summer downturn - economic turmoil abroad and high stock valuations in the US - have been fully resolved.
Look for red flags, says Stack, something that seems out of kilter with a genuine rising market.
Example: "Consumer confidence has now slumped over 20 points in four months. That steep of a drop has occurred only six times since the late 1960s," says Stack, "five of which ended in recession."
To see if a bear trap is over, Stack says, be patient. Wait for the Dow Jones Industrial Average to fall below 7500, marking a true 20 percent decline from its high of 9300 last July.
"In a period like this, people always think they have to do something, to get back into the market because everyone else is getting in. But maybe the best thing to do is just wait awhile, until the picture is clearer."
Still, those who fret a bear trap at this juncture are clearly in the minority. Peggy Farley, of Ascent Asset Management, says that staying out of this market means missing much of the year's gains.
"Invest cautiously," she says, but keep a presence in the market.