Sentiment is Driving the “Bear Market”

• Posted by Greg Harmon
• on February 3rd, 2016

Sentiment drives markets, there is no doubt about that. But I often wonder what is it that drives sentiment. There are many good reasoned answers to this. Facts drive sentiment. Changes in the way people think about a process based on experience can drive sentiment. But more often than not it seems sentiment is driven by whimsy or perhaps the hard wiring of our human brains.

This issue has taken up more of my thinking lately because of the all-in type breadth of sentiment that is behind the thought that the stock market is in a bear market. Last night I asked the question “Was April – October 2011 a Bear Market?” No picture or any other information attached. 58% of respondents to my poll said no. Below is a chart of the S&P 500 during that period.

From peak to trough the S&P 500 pulled back over 20% during that 6 month period. If you look at places like Investopedia or even main stream media like CNBC for a definition of a bear market they all state it requires a 20% pullback over at least a 2 month period. Doesn’t this qualify?

With the pullback right at the limit and given the benefit of hindsight, it does not bother me so much that the result was what what it was. But put it in the context of the current market and it gets more confusing. If over half do not think a 20% correction over 6 months was a bear market, why is sentiment so overwhelmingly in favor of defining the current environment as a bear market? Below is a chart of the S&P 500 since July 2015.

This chart shows the S&P had pulled back 15% on the spike down January 20%. Still another 5% to go until it would be defined as a Bear Market. Yet do you know of more than a handful of investors that do not believe it is a Bear Market? Sentiment is a fickle thing, and drives markets.

A definition of a Bear Market seems to many to be unimportant. But it is also a feedback mechanism. When sentiment is bearish and more define the market by it the sentiment becomes more bearish. This will continue until there are no investors left to be bearish or something else changes it.

That feedback loop is definitely pointing to the Bear at this time. Is everyone right?

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