Earlier this week, we took a look at bear markets, bull markets, bear market rallys, and bear market corrections. This is no surprise, but the market has had a rough go of it lately. Let’s take a deeper look at recent market history. The Dow Jones Industrial average had been in a bull market since 2002, when it hit a valley of 7,500. Since then, it had ascended to a high of about 14,100 in October, 2007. With the recent market turmoil, it has descended to 11,800 in March of 2008, for a decrease of 16%. What do the charts show us?

Dow Jones Industrial Average from 2001 to 2008

The Nasdaq has not fared quite as well overall in the last few years after taking a humongous hit earlier this decade when the tech bubble burst. After slowly climbing to about 2,800, it has since dropped 22% to roughly 2,200 (before surging upwards about 5% this week). Let’s take a look at the Nasdaq chart:

Nasdaq Composite Index from 2004 to 2008

Prior to November of last year, we were definitely in the midst of a long bull market run. Since then, market indices have dropped roughly 20% and you could say that we are on the cusp of moving from a bull market correction to what could be the beginning of a long-term bear market. Which one will it be? It’s too early to say right now, as these types of labels usually only work in hindsight. What is obvious is that there are a number of huge macroeconomic factors working against the market right now:

• With the GDP recently slowing to a crawl, it looks like we are in the beginning of a recession.
• The credit crisis is unprecedented in scope in U.S. history.
• The housing slump does not look like it will recover anytime soon.
• The financials sector has taken some huge price hits, most recently with Bear Sterns dropping from $170 in 2007 to recently being bought out for $2 per share (recently bumped to $10 based after investors wouldn’t sell their shares in protest). The fed is now having to come in and save some once mighty financial institutions.
• The fed is cutting interest rates significantly, further devaluing the U.S. dollar compared to other currencies.
• The trade deficit is huge, and growing.

These are some huge economic problems that will take time to fix. A bull market correction usually is a temporary hiccup, if you will, that tends to quickly resume in a bull market. What we’re seeing right now seems to be more than a mere road bump. As a result, I don’t see the bulls jumping back into play anytime soon. What should you do? My recommedation is to hold on for the bumpy ride.

What do you see happening in the market in the coming months or years?

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