More on stock guru Bob Farrell’s rule #8

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I posted “Bob Farrell’s 10 rules for investing” a few days ago, and these words of wisdom turned out to be popular reading material.

Given the debate as to as to whether the US stock markets are experiencing a primary (secular) bull market or a rally within a primary bear market, i.e. a so-called cyclical bull market, Farrell’s rule #8 has caused a fair amount of food for thought:

“Bear markets have three stages – (1) sharp down, (2) reflexive rebound and (3) a drawn-out fundamental downtrend.”

In an attempt to put these stages in perspective, David Rosenberg, chief economist and strategist of Gluskin Sheff & Associates, provided a graphic illustration of Farrell’s three stages, as shown below. (As Rosie’s comments date back to August last year, the graph has just been updated by my colleagues at Plexus Asset Management.)

Click on the image for a larger graph.

Source: Gluskin Sheff & Associates – Lunch with Dave, August 7, 2009 (updated by Plexus Asset Management on April 26, 2010).

Whether stock markets will enter a drawn-out downtrend any time soon remains to be seen, but given the magnitude of the rebound a pullback certainly looks likely. Caution seems to be in order.

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4 comments to More on stock guru Bob Farrell’s rule #8

  • richjoy

    Prieur du Plessis — I don’t know that I’ve ever sent you a note before (though I have long enjoyed your letter).

    With respect to the 3 charts and Bob Ferral’s Rule #8, I am left to wonder:

    (1) Has this “drawn-out fundamental downtrend ALWAYS applied to bear markets? (i.e.; there have been at least 8 recessions and more bear markets in my lifetime (e.g.; the crash of ’87 was a bear market, but not a recession)…so if Mr. Rosenberg, a noted perma-bear, did not cherry-pick his 3 charts, and if this really is a “rule” I am left to wonder if a chart of ALL bear markets would in fact show a “drawn-out fundamental downtrend” following a reflexive rebound?…and;

    (2) Has there EVER been a V-shaped recovery, and if so, is such a recovery in conflict with “a drawn-out fundamental downtrend”?

  • The click through (large version) .JPG is an early version of your chart that only runs out until summer 2009.

    Interesting because if one traded on such a model (an analog), rather than on price movement, one would have missed another 33% from there (from SPX 900 to 1200) – a definite mistake if one’s goal is to capture market movement, up or down.

    Respectfully,

    John Hamon
    FractalBox Advisors, LLC

  • Richard Hutchinsonrhut

    richjoy,if you will pull up EWI.com you can answer your own question… Ralph Nelson Elliott
    answered that question for all time, back in the
    1940s… check it out you will be surprised !!!

  • Richard Hutchinsonrhut

    By the way richjoy, 1987 was not a bear market
    but a correction in a Bull Market…Just as
    this is a correction in a Bear Market…

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