Bull markets that follow epic bears

June 20, 2016 12:56 PM

The gold mining stocks continue to defy any bearish price action or perceived bearish development. Pundits first warned because of the “bearish” Commitments of Traders data. The commercials are always right and a big decline is coming! Then, we heard the miners were too overbought and would have to correct 20%. (I thought this once or twice!) Next, we heard gold was forming a head and shoulders top. Conventional analysis is failing in trying to predict or even explain what is happening and why. A look at history helps explain why the gold mining sector has remained extremely strong and almost immune to any sustained correction. Simply put, history shows that epic bears give birth to bull markets that, in their first year, do not experience any significant correction or retracement.

The Nasdaq, which is comprised of mostly tech stocks crashed 78% during its bear market from 2000 to 2002. That epic bear followed a full blown mania and a strong recovery followed that epic collapse. The Nasdaq rebounded by 94% in 15 months and only endured one significant correction during the recovery. That 17% correction occurred while the market was in a bottoming process. Once the Nasdaq exceeded 1,400, it enjoyed smooth sailing to 2,100 over the next nine months. 

The next chart plots the S&P 500 and the Nasdaq from 2008 to 2011. The bear market in price terms was the worst for the S&P 500 since World War II. Its recovery was equally as spectacular as the index gained 83% in 13 months without correcting more than 9%. During the same period, the Nasdaq doubled and did not shed more than 10%!  

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