If you haven’t seen the movie “The Revenant” with Leonardo DiCaprio, it is a 2015 American survival drama describing frontiersman Hugh Glass’s experiences in 1823. Hugh, an expert hunter and tracker is mauled by a grizzly bear in the film. (Warning: the scene is very graphic)

YouTube video

In the scene, the attack comes in three distinct waves.

  1. The bear attacks, and brutally mauls Hugh, who plays dead to survive. The attack subsides.
  2. The bear comes back, and Hugh shoots it, provoking the bear to maul him some more.
  3. Finally, Hugh pulls out his knife as the bear attacks for a final fight to the death. (Hugh wins if you don’t want to watch the video.)

Interestingly, this is also how “bear market phases” work.

Bob Farrell, a legendary investor, is famous for his 10-Investment Rules to follow.

Rule #8 states:

Bear markets have three phases – sharp down, reflexive rebound and a drawn-out fundamental downtrend

  1. Bear markets often START with a sharp and swift decline.
  2. After this decline, there is an oversold bounce that retraces a portion of that decline.
  3. The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.

Dow Theory also suggests that bear market phases consist of three down legs with reflexive rebounds in between.

Bear Market Phases, Bear Market Phases Are Like “The Revenant”

The chart above shows the last two primary cyclical bear market phases versus today (I adjusted the 2022 scale to match.)

As would be expected, the “Phase 1” selloff was not pleasant.

The Reflexive Bounce Is Coming?

That selloff sets up a “reflexive bounce.”  

On Wednesday, I discussed the chart below in a Fox Business interview with Charles Payne.

The question is simple. What is the difference between a 10% decline in a bull market versus one that leads to a bear market?

As shown, it all depends on whether you are entering into a recession or not.

Bear Market Phases, Bear Market Phases Are Like “The Revenant”

The risk of a “bear market” is rising. Inflation was surging before the surge in oil prices. Now those higher prices are impacting consumption as liquidity support is reversing. The massive infusions of fiscal liquidity in 2020 and 2021 are gone. The Fed’s QE program ended on Wednesday, which is extracting more liquidity from the markets. And next week, the Fed will hike interest rates, further tightening monetary policy.