Breakout

80% Likelihood of Bear Market in 2012: Sam Stovall

Breakout

If we get through the dreaded month of October without a Black Monday or Black Friday market calamity, then we'll have plenty to be thankful for come November.

According to one market watcher, the odds are that October will not be great even though the 4th quarter might be. ''You could say this might be a tale of two time frames, where we do get a bit more washout in the month of October, but then our traditional year end rally in November and December, only to be back in the soup again once we are back in January and the New Year as this bear market finally plays itself out,'' says Sam Stovall, chief equity strategist at Standard & Poor's.

As it stands now, the S&P 500 is about 17% down from its late-April high and has avoided what the Russell 2000 (^RUT), Emerging Markets (EEM), Dow Jones Transportation (^DJT) and Nymex crude oil have not, and that is, slipping into a bear market --a 20% decline from their recent highs.

But Stovall's work suggests the benchmark will likely join them. That's because, since 1945, 80% of the time that the S&P fell by 15% or more, it continued its slump to become a new bear market. In fact, Stovall says, it takes an average of 9 months for the market to go from peak to bear, at which point it continues falling for another 5 months to post an average decline of 33%. Bottom line, if history were to repeat itself, the S&P 500 would hit 915 sometime next year, around June.

Until then, we could be on the cusp of a brief window of year-end opportunity. That's because an awful third-quarter historically precedes a positive fourth-quarter. Stovall says, out of 66 third-quarters since 1945, there have been 10 that declined 10% or more, including this year's. Of the previous 9 third-quarter wipe outs, Stovall discovered that the S&P 500 turned positive in Q4 8 out of 9 times by an average of 7.2%. That's an .888 batting average that we get a 4th quarter pop of some degree, or a mini-bull within a broader bear.

As far as hiding spots, you can forget about stocks. Stovall says all assets classes, except Treasuries, decline in a bear market although Consumer Staples, Health Care, Utilities an Energy have outperformed the benchmark 82% of the time.

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