In  this information age we are all inundated by data, forecasts and opinions. Some based their forecasts on life experiences, statistical analysis, historical references, or even just opinion. In the end some will be correct, and most will be incorrect. To pick and choose among the various resources is a matter of personal preference. Yet, to pick and choose too many resources will result in information overload. We can all agree, economically these are treacherous times. Banks are dysfunctional, credit lines are tight, businesses that relied on ever expanding credit are failing, unemployment is rising, and deflationary pressures are everywhere.

We can all also agree that this is a cyclical economic downturn and not just an equity bear market. In the past century all cyclical bear markets have displayed similar characteristics. First, the equity market loses 50% of its value. Second, there is a 50% retracement of the entire bear market. Third, the final downleg. We label these three events are Primary waves A, B and C. The 1937-1942 cyclical bear market: lost 50% in a year, retraced 50% in a few months, and then took three years to retest the lows. The 1929-1932 bear market: crashed 50% in a matter of months, retraced 50% within a few months, and then continued to decline for the next two years until the market lost about 90% of its value. Technically, the main difference between the two cyclical bear markets is the 1929-1932 bear market continued to make new lows for the next two years after the initial 50% decline. While the 1937-1942 bear market went sideways for a few years, and only made new lows at the end.

Our current cyclical bear market has already declined 50%, but has yet to retrace 50% of that decline. The retracement may be underway now, as the market has already rallied 24% off its recent lows. When the retracement does complete, Primary waves A and B will have completed, and then Primary C will be underway. Only then can we estimate the potential total damage to the equity market. Prior to these two events occurring, many forecasters are just making educated guesses. Should the bear market stall we’ll enter a 1937-1942 scenario. Should the bear market start making lower lows, 1929-1932. The 1929-1932 bear market displayed some chartacteristics of its own. More on this should the need arise. When this bear market does complete its 50% retracement, to remain in equities would be a high risk venture.