China’s stock market has fallen sharply over the past month, and I want to describe what this bear market looks like from a historical perspective.
Prior to the current drop, there were three bear markets over the past 15 years:
2001-2005: 55% drop
2007-2008: 73% drop
2009-2013: 47% drop
Current drop: 34%
The drops of 2001-2005 and 2009-2013 subdivided into multiple waves, but the deeper 2007-2008 drop had no obvious subdivision. The market’s history suggests that the current drop has further to go. The market is not likely to bottom until we get either a 50% drop with subdivision, or a 70+ percent drop without subdivision. The former case involves a bottom around 2500, whereas the latter case involves a bottom around 1400.
One thing worth noting is that, despite the huge drops in the stock market, China has not had a year-on-year GDP decline since 1988, based on data from tradingeconomics.com
In late 2014, I began describing what looked like a Three Peaks Domed House pattern on the Dow. The pattern did not unfold the way one would usually expect, so I wasn’t sure during the spring if it was still happening. However, just recently, the market’s movements have suggested that the pattern is underway after all. I have the Dow’s Diamonds ETF chart labeled below:
The two weaknesses of this instance of the pattern are the absence of Points 11-14 (which retest the Point 10 low), and the unexpected overlap between Points 15-20 and 21-25. However, I think these issues are minor compared to the bigger story, which is that the DIA chart looks very bearish right now due to the head and shoulders top and break below the neckline (and assuming the Three Peaks Domed House is still on, we would be in the bearish phase of the pattern now).
After the Point 23 top, the index usually falls to the Point 10 low. Right now, that implies a drop to 15,800 on the Dow. I think we will see the bottom of this correction in August due to a Middle Section pattern on the Dow that I described here.
Now, about the situation in Greece. If Greece leaves the Eurozone, I am optimistic that the negative impact would be short term for the rest of Europe and world, resulting in a severe correction in stock markets around the world, but not a full-fledged bear market. Because the Eurozone is experiencing near-zero inflation, I think the European Central Bank could engage in QE-like programs if necessary to stabilize the financial system without causing adverse inflation. This is in contrast with 2008, when U.S. banks were failing at a time of record high oil prices.
So, I think the picture painted from both a technical and fundamental perspective right now is a major correction, but not a bear market.