Market watcher and analyst Steve Leuthold and his team at The Leuthold Group in Minneapolis have come up with interesting new market definitions.
According to The Leuthold Group, the modern definition of a bear market is: "A market that is down for as much as week."
The modern definition of a major correction is: "A market that is down for a day"
The new definition for a correction is: "A market that closes off its daily high."
The new definition of an "old timer" is a person that actually knows someone who lost money in the stock market, while an "old fogy" is "an investor who remembers experiencing a 10% stock market decline." A cynic is "anyone who reminds you that stocks can go down."
A conservative investor is a person who is 100% invested in stocks, but does not have a margin account, while a defensive portfolio is one that is 5% cash and 95% equities.
There are many more of these wonderful modern definitions in Steve's monthly publication, Perception. Of course, they are offered in jest by Steve and his team, but there is a point to be made. The market has been so good for so long investors may have become overconfident.
In fact, the definitions, although exaggerated, so accurately reflect the attitudes of many investors today they ought to serve as a caution.
It is eight years since the last serious market correction, the shock of Oct. 19, 1987, and the market is now at 2.7 times the level it reached at the bottom of that correction. It is about twice the level of the market immediately before the correction.
The last period that even approaches a true bear market was the 1980-'82 period, i.e., 15 years ago. And some market analysts claim the last real bear market was as far back as 1973-'74.
This long period of relative calm in the stock market has led many investors to accept with equanimity price-earnings ratios that a few years ago would have led them to take defensive positions.
Now most investors can rationalize the high stock prices and high p/e ratios. Inflation is low, they say. Interest rates are declining. Corporate profits are strong. The economy shows no signs of overheating.
In the past, before a bear market hit, distortions became apparent in the economy - overheated consumer demand, or too much leverage, etc.
These distortions were then exploded by some triggering event into a bear market.
Now there are no apparent distortions in the economy on which a triggering event could act to precipitate a crisis and a sell-off.
Could the current market prices themselves be a distortion? Could the fact many "old time" portfolio managers have never experienced a real bear market be a distortion? Could the fact there is so little fear of a bear market or serious correction be a distortion?
Steve Leuthold's new definitions suggest that, yes, these may signal distortions, if not in the larger economy, at least in the investment world.