Book Reviews, Macroeconomics, Trading

Book Review of Bear Market Investing Strategies by Harry Schultz

The full title of this book is Bear Market Investing Strategies by Harry D. Schultz (2002).

Harry Schultz wrote the International Harry Schultz Letter for 45 years, with his last newsletter in January 2011 when he retired at 86. 45 years is a pretty amazing run!

This book is a quick read coming in at ~150 pages. The book quotes frequently from various famous market technicians such as Robert Rhea, Charles Dow, Joseph Granville, H. M. Gartley, etc. I like how the book wrote about some finer points, that a dull market should be interpreted differently depending on whether it is a bull market or a bear market, that the initial decline that starts a bear market occurs on light volume so it can be hard to differentiate it from a normal bull market retracement, and that actions to take during a bear market depends on whether it is an inflationary or a deflationary recession/depression.

I find it interesting that the author quotes a lot from Robert Rhea, who wrote that “An understanding of a secondary reaction is needed by traders to about the same extent as a growing cotton crop requires sunshine”, yet he followed that with “It is usually impossible to pick the turn [peak of a bear market rally] with any degree of precision”, which may explain why Rhea wrote in 1938 that the bear market “may last for a week, a month, or many months”.

Lastly, I particularly like a chart in the book titled “The Constant Dollar Dow” (Figure 19.1) which spans two pages, and plots the DJIA, the DJIA in constant 1913 dollars, and the CPI in the same chart from 1920 to 2002. The chart labels (index value and month) all the peaks and troughs of the market and serves as a great view of the market history. While writing this post, I stumbled upon this very nice chart of the Dow from 1900 to the present by also provides other long time series charts here. It’s a pity that the data doesn’t seem to be downloadable though. If any one knows of a good free/cheap source to get very old historical market data, do let me know.


Dow’s Great Law of Action and Reaction (50% Principle)

  • Charles H. Dow wrote an editorial published in the Wall Street Journal on July 7, 1900.
  • “It is a remarkable fact in speculation that both the average price of a number of stocks and the price of individual stocks show strong tendencies, both in rallies and relapses, to reach one half of all the primary movement…. When a recovery does not comes near being one half of a decline, it generally means that the primary movement has not been completed and that a new low quotation will be made.”

No Exact Retracement % for Reactions

  • Robert Rhea: If we could say that the great majority of secondaries terminated around the 50% recovery point, speculation would be easy. Unfortunately, careful analysis shows that 7% of all reactions terminate after retracing 40-55%, 27% after tracing 55-70%, 8% after retracing 70-85%, with 14% of all secondary movement extending beyond 85% retracement.

Reactions Are More Violent

  • Reactions (whether in bull or bear markets) nearly always consume less time and are more violent than are movements in the direction of the primary trend.
  • It is not unusual for a 3-week rally in a bear market to retrace 30% to 60% of a downward swing, which may have taken many months to complete.
  • Bear market secondaries often present a bouncing or turn-on-a-dime appearance; the rallies seem to spring from no visible base or area of support.

“Never Sell a Dull Market” Does Not Apply for Bear Markets

  • Dow in 1902 wrote “… the action of the market after dullness depends chiefly upon whether a bull or bear market is in progress. In a bull market, dullness is generally followed by advances, in a bear market, by declines…. in bear markets, prices fall because values are falling, and dullness merely allows the fall in values to get ahead of the fall in prices.”

The Process of Changing Makes Prices Move

  • Jim Sibbet: Whenever a sizable (over 10%) market movement occurs, it continues until the public, generally emotional, changes its mind and joins the movement. At first the tendency is toward disbelief, then gradually a few change, then more, and finally the overwhelming majority change their minds to such an extent that everyone will agree as to the prevailing opinion. When there is a conflict of opinion about the public’s attitude, …, the movement continues until there is no longer any doubt as to what the public’s opinion is.
  • The 1930 rally ran up until everyone was convinced another bull market had started…. Until there is unanimity of opinion, the current uptrends are likely to continue, because there are many people who are yet available to change their minds. Others who have already changed their minds are waiting for a good reaction to buy cheaper. This helps support the dips. It is the process of changing that makes prices move. After everyone’s mind is made up, the movement stops and reverses.


Signs That a Bull Market is Ending

  • Sentiment
    • Consumer confidence is high
    • Investor sentiment is bullish while the underlying economic structure continues to weaken.
    • Price earnings ratio are divorced from values of companies
    • Unanimously bullish forecasts.
  • Macro
    • Interest in gold and gold shares pick up.
    • Interest rates are already low
    • Sharp rise in consumer debt, household debt service payments, losses by credit card issuers, bankruptcy filings, and mortgage delinquencies.
    • Lots of public speculation in real estate.
  • Market action
    • Churning action in the stock market.

Signs That a Bear Market is Ending

  • Sentiment
    • Bad news abundant, pessimistic forecasts
    • Low P/E, high yields
  • Macro
    • Credit balances in brokerage accounts are considerable. Large holdings in bonds and other cash-related investments are latent buying power.
    • Real estate prices are down (unless it is an inflationary bear market), empty commercial buildings, foreclosures rise.
    • Bonds are popular, yields are low.
  • Market action
    • Low volume, new lows occurring on lower volumes, rallies occur on higher volume.

Three Phases of a Bear Market (Robert Rhea)

  1. Phase 1 — Abandonment of the hopes that fueled the earlier bull market
  2. Phase 2 — Reflection of decreased earning power and reduction of dividends
  3. Phase 3 — Distress liquidation of securities to meet living expenses

How Volume Changes as a Market Rolls Over (Joseph Granville)

  1. Phase 1: Decline on light volume — professionals are selling, public remains confident.
  2. Phase 2: Decline on heavier volume — professionals are selling, public starts to lighten up
  3. Phase 3: Decline on still heavier volume leading to a selling climax — professionals finish selling, public selling heavily
  4. Phase 4: Temporary rebound — professionals cover their shorts and buy, public continues to sell


  • Advance-decline line
  • New highs – new lows
    • Chart SMA (daily number of new highs, 5) and SMA (daily number of new lows, 5)
    • Check that during a reaction that interrupted a major upswing, the new highs line remained on top.
  • Odd-lot balance index
  • Odd-lot trading ratio
  • Odd-lot short sales index
  • Volume
  • 30-week SMA of DJIA (Friday close)
  • 10-day SMA of (advances – declines)
  • Barron’s Confidence index
  • Short interest
  • Short interest ratio
  • Brokers’ Free Credit Balance Index
  • Brokers’ Debit Balances Index
  • Nasdaq indexes
  • Resistance Index
    • If DJIA is up, resistance index = (total issues traded – total issues advancing) / total issues traded
    • If DJIA is down, resistance index = (total issues traded – total issues declining) / total issues traded
  • Leadership index
    • Average price of the daily volume leaders. This shows the kind of leadership in the market.
    • If it falls on upswings or rise on downswings, it’s bearish.
  • Percent of advances index
    • 10-day SMA of (Daily advances / Issues traded)
  • Gold shares index
  • DJIA 10-day SMA of internal volume
    • Formula = SMA (total volume of all DJIA stocks that rose, 10 days) – SMA (total volume of all DJIA stocks that fell, 10 days).
    • Plot this to measure blue-chip strength and use trend lines.
  • DJIA resistance
    • Plot daily volume of unchanged issues. When unchanged volume is high, whatever the market did that day is “wrong” will be reversed the next day.
  • DJIA volume ratio
    • Volume of all DJIA stocks / Volume of the market as a whole. High ratio is bullish, low ratio is bearish.
  • 200-day SMA of advance-decline line
  • Nasdaq volume leaders
    • Record plus and minus action of the top five Nasdaq most active stocks.
    • First day of five consecutive pluses is bullish signal, first day of five consecutive minuses is a bear market signal.

Take Action Only When Indicators Heavily Favor One Side

  • In working with indicators, unless you have truly heavy weight on the side of buy or sell (e.g. 17 buy, 4 sell, 9 neutral), you cannot hope to succeed, on average.


Criteria for Short-Sale Candidates

  • Stock had a large rise in recent weeks or months on increased volume, so people will rush to sell when it breaks down
  • Shows a top area of distribution (large volume but unable to rise further) and has started to break down.
  • Not yet declined more then 10-15% from its secondary peak.
  • Abnormally high P/E ratio
  • Low short interest (relative to free float shares in the market)
  • Avoid thinly capitalized stock or low-liquidity stocks.
  • Better if the stock has hit a heavy oversupply area or a prior support that had broken down earlier.
  • Avoid cheap stocks under $5.

Stops in a Short Position

  • After entering into a short position, place a stop-close-only order (to avoid getting stopped out from intra-day flukes) about one or two points above the downtrend line. You want out of your short at once, not caring if it’s a so-called false break or a genuine reversal.
  • Trail the stop down based on the trend line.

Don’t Hold for Income in a Bear Market

  • Put money you can’t afford to risk into defensive issues such as bonds, preferreds, utilities, Muni’s, or, in the case of an inflationary bear market, bonds and tangible assets.
  • Even living off capital at such times is cheaper in the long run than holding stocks that decline.


Real Estate Performs Differently in Different Bear Markets

  • In inflationary bear markets (i.e. bear markets due to high inflation), real estate is seen as a haven and prices rise.
  • In bear markets where inflation is low and the currency firm, real estate prices will usually stay firm in the early stages, but will decline as the bear market deepens.
  • If headed for a depression and you aren’t married to your home, sell before the property falls much, rent rather than own.
  • In a deflationary recession, interest rates usually decline, so try to refinance any mortgages.

Bond and Cash-Equivalents

  • In an inflationary environment, hold bonds of other currencies that are not suffering from high inflation.
  • Else, having a major portion of your portfolio in bonds (Treasury bonds with 5-10 year maturity of quality corporate bonds) and bank accounts at interest is prudent.

Tangible Assets

  • In an inflationary recession, stamp or coin collection, jewelry, rare stones, antiques, art, old cars values are likely to increase much more than the increase in inflation.
  • In a deflationary recession, all things will decrease in value.


  • In times of uncertainty, gold rises regardless of whether the climate is deflationary or inflationary, though gold usually rises more during times of inflation.
  • In the early stages of a bear market, buy a 10-15% investment in gold bars, gold bullion coins and gold mining shares — all three.


List of Bear Markets

Year DJIA Decline Months Start Low
1900 31.8% 12 Dec 1899 Jun 1900
1903 37.7% 10 Nov 1902 Sep 1903
1907 45.0% 10 Feb 1907 Nov 1907
1909 26.2% 8 Nov 1909 Jul 1910
1912 23.5% 26 Nov 1912 Dec 1914
1917 40.1% 13 Dec 1916 Dec 1917
1919 46.6% 21 Nov 1919 Jun 1921
1923 18.6% 7 Mar 1923 Oct 1923
1926 16.6% 2 Jan 1926 Mar 1926
1929 90.0% 34 Sep 1929 Jul 1932
1934 24.1% 9 Jan 1934 Oct 1934
1937 51.8% 56 Aug 1937 Apr 1942
1946 24.6% 37 May 1946 Jun 1949
1953 13.9% 9 Dec 1952 Sep 1953
1957 20.3% 6 Apr 1957 Oct 1957
1960 18.0% 10 Dec 1959 Oct 1960
1962 29.0% 6 Dec 1961 Jun 1962
1966 26.6% 8 Feb 1966 Oct 1966
1968 36.9% 17 Dec 1968 May 1970
1973 46.6% 23 Jan 1973 Dec 1974
1977 26.9% 18 Sep 1976 Mar 1978
1981 24.9% 17 Apr 1981 Aug 1982
1984 16.0% 7 Dec 1983 Jul 1984
1987 36.1% 3 Aug 1987 Oct 1987
1990 17.0% 4 Jun 1990 Oct 1990
2000 38.1% 21 Jan 2000 Oct 2002



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