Tune out the forecasters. Here’s how investors should approach this bear market

Traders work on the floor of the New York Stock Exchange during morning trading on August 15, 2022 in New York City.

Michael M. Santiago | fake images

Economists, Wall Street analysts, hedge fund managers and public forecasters have all been all over the map lately trying to guess the ways of Wall Street.

Some have suggested that the market has already bottomed and the bear market is over.

Others are calling for another 20% drop in the S&P 500, which is down nearly 20% in 2022.

Still others predict a total collapse that would be worse than 2000-2003 or 2007-2009.

Some analysts are also making calculations on projected earnings declines for the S&P 500, giving a range for the market to bottom between 3,000 and 3,400 sometime between now and 2023, but those estimates are also quite mixed.

It’s a wild time in the forecasting community these days, when it comes to the markets, the Federal Reserve, the direction of the economy, and all the attendant risks going forward.

Outlook on this bear market

There is a better and simpler way to watch this bear market in stocks.

First, there are no significant positive signs that it’s over.

Second, several criteria must be met for a new cyclical or secular bull market to begin:

  1. The Fed must complete its tightening cycle.
  2. Technicals call for a retest of the June lows.
  3. That push low (June) is often followed by a price low (TBD) before the market bottoms out.
  4. The VIX should rise above 40 as a sign of capitulation among the latest bulls.

None of those criteria have yet been met.

The Federal Reserve is is still raising rates, likely by another 0.75 percentage point when it delivers its interest rate decision next week.

Some notable economists anticipate that the Federal Reserve will raise rates by a full point.

Fed speakers have indicated they are willing to raise rates further and, at least in theory, keep them elevated through 2023. This is not fertile ground for a new bull market.

We also need to retest the minimums.

The VIX, or so-called “fear indicator,” a measure of market volatility, has not seen the levels of panic normally associated with a capitulation bottom.

In fact, it is a rather strange phenomenon that various volatility readings in stocks, bonds and commodities such as oil are not working in unison, despite very close correlations in their respective price actions.

I have yet to hear a good explanation as to why the VIX stock market is depressed relative to realized volatility in the stock market.

That worries me that this bear market is not over yet.

The bottoming out process

Noted technical analyst John Bollinger instructed me a long time ago on the bottoming process.

A momentum bottom hits the market first, followed by a subsequent “bear market rally” (or rallies) and finally a price bottom, when key averages shed the momentum low by a small amount and then begin to reverse course.

A catalyst of some kind usually triggers the beginning stages of a new bull market.

In short, there’s a lot of screeching going on right now amongst the chat class, much of it loud and inaccurate.

Here a simpler and more direct analysis is required, in relation to the joke in which many are currently involved.

Bottom line, meet all of the above criteria and start over.

Less noise, more history: a simple lesson in a rather complex environment.

In the meantime, long-term investors should stick to their disciplines and take advantage of a bear market that will one day come to a rather “unexpected” and “unforeseen” end.

— Ron Insana is a CNBC contributor and a senior adviser to Schroders.

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