Dow Theorist Richard Russell on the psychology of Bear markets:

1) The first phase is the one where the bear market wipes out the optimism and excitement which existed at the preceding bull market’s top. I believe we are in the first phase of the bear market now.

2) The second phase of a bear market is usually the longest phase. This is the phase where it gradually dawns on stock holders that business is deteriorating and that we are moving into hard times. I believe we are now close to the second phase.

3) The third phase of a bear market is the “throw ’em in” phase where stocks are sold for no other reason than that the sellers need to raise cash.

During the latter part of the third phase, blue-chip stocks will sell “below known value,” and dividend yields on top-quality blue-chip stocks will climb above 6% or more. Investors will turn black-bearish, and we will hear opinions such as “This is the end of capitalism,” and “The nation may not survive.” As a pure guess, I think that if or when the Dow breaks below its March 9, 2009 low of 6547.05 (and I think it will) that will mark the end of the second phase of the bear market and the start of the third phase.

June 3, 2010