The Never-Ending Bear Market

Before we get too excited about the possible end of the recession, and an economic recovery, it is important to get a bit of perspective. Deflationary depressions (which is what we are experiencing) can be long-drawn out affairs. The 1930s was one of the most volatile periods for the Dow Industrials on record. More recently, Japan has been experiencing one massive bear market since 1989.

The chart below says it all. There has been at least 5 major rallies in the Nikkei since 1989 (depending how you count), only to have the market tank even lower lows. Some of those rallies even lasted for a good period of time. The rally in the 2000s lasted over 5 years (rising some 140% from the 2003 bottom) , before new 20 year lows were reached in 2008.

If the US in entering a lengthy period of credit deflation (which is a theory I subscribe to), then there is a good chance the rally of 2009 will fail, and the markets will reach new lows. Unfortunately, I don’t think we will have the luxury of years before this rally peters out.

If anything meteoric rallies are sure-fire sell signals. Swift rallies (that cover a lot of ground in a short period of time) almost always occur during bear markets. The great rally of 2009 isn't any different.