July 15, 2018 (Updated July 18, 2018)

As I previously reported[1], all major bear markets since the S&P 500’s inception always have a prelude – a substantial drop from an initial peak followed by a recovery to a second peak whereupon it drops in earnest. Spans between the first and second peak vary but the longest was 165 days, between March 5 and August 17, 1937, 110 trading days. If we are on the cusp of a bear market and building a second peak, that span was eclipsed last week – a process that continues this week at 173 days and 113 trading days without topping. If it continues to major bear territory this market will have started out making history back in 2017, before the first peak, when it broke the record for most consecutive days without a 3% drop and would now be closing in the same fashion.  

I have long held that March 13’s S&P 500 charge up to 2801.90 was (1) too early to be a second peak and, (2) would need to be surpassed before a potential second peak climaxed. With last Friday’s intraday high of 2804.53 we have passed that marker. Historically, the range for the second peak in major bear markets has been from -7.4 below the first peak to +2.9%. The low point came in 1929 and since then the median has been -0.6%. With Friday’s high 2.4% below the January 26 high, that leaves us with an upside potential of 5.3%, if this was indeed the second peak. If that was the case, there is no reason this market should not continue its record-breaking trend and go beyond the historical range. However, the longer and higher it goes, the more likely the case that this is just normal market activity and not the normal pattern prior to a major bear market. 

Still, at some point in time there should be a major downturn and I have already discussed demographic reasons why our economy would go through one.[2] Anecdotal data suggests the time is ripe. Despite May’s surge in retail sales, these demographic causes have been manifested in struggling retail sales for the first three quarters of 2017 and the first four months of 2018. This was particularly so in businesses depending on discretionary spending such as auto dealers, building materials dealers and department stores. 

The May surge may…

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