The definition of a bear market is broad selloff in many stocks and the indices of 20% or more. There have been two good recent examples -- in February-March 2020 when the COVID crisis hit and in the last couple of months of 2018 when the short volatility trade blew up.
While these sorts of bear markets are uncomfortable to deal with, there is no great mystery about how to deal with them. The best move is to stay out of the way, protect capital, and wait for some indication that a bottom is forming.
The current market offers a much more challenging situation. There are elements of a bear market in some speculative small-caps and many growth stock names but what is missing is the correlated selling that drags down everything in tandem.
On Tuesday, there was some very poor action, with the Nasdaq falling over 2% before a late bounce and better than 2 to 1 negative breadth. The action was poor enough for Investors Business Daily to change its market outlook to 'uptrend under pressure'. Despite this action, the DJIA still managed to close in positive territory and is still hovering near all-time highs.
This two-tiered action presents a dilemma for market players. Do they stay with the positive relative strength in the big-cap names driving the indices? Do they start looking for the corrective action under the surface to start to spread to the DJIA? Can the stocks that have already been pounded into a bear market find some support if the big-cap indices finally start to correct?
There is no easy answer to these questions. Traders that have been trying to bottom fish groups like biotechnology and SPACs have had little luck as the bounces have fizzled out very fast. There is no liquidity driving these smaller names like there was back early in the year, even though many are good values and stories.
There are a few narrow pockets of momentum like oil, NFTs, RVs, and a few other things, but primarily it is big-cap value with limited growth that is the safe have that is preventing the correlated selling that we typically see in bear markets.
My game plan is to simply stay patient and wait for further developments. The gap between the two extremes in the market will eventually close, but there is no way to know how that process will occur. I see plenty of stocks that I think will do well over time, but they are not acting well, and that is all that matters in the short term.
We have a slightly positive open on the way, but buyers look tentative, and trust levels appear to below.