What if we ARE in a bear market? Why is that so unthinkable? Nobody has outlawed market cycles. The market usually goes into decline when the majority are finally set in their belief that we are on a permanently upward trajectory.
A closer look reveals that ONLY three groups are propping up the market: oils, metals, and agriculture. Everything else is declining: retailers, restaurants, techs, drugs, healthcare, leisure, airlines… The last time the breadth was so poor was in the early 2000 when only the Internet and technology stocks were advancing.
Now, I am not a top down economist. I won’t engage in a complicated analysis of myriad statistics, indicators, assumptions, and projections to deduce where we are going to be six months from now. I am a stock trader. I go by what stock charts tell me. Right now what l I see is that it ain’t 2003 – the majority of charts are broken. That means that the benefit of the doubt should go to the downside, and investors’ expectations and strategies should be adjusted accordingly.
The market does not wait for you. If you are a latecomer, there is no point in wishing the market up. It won’t. You will lose arguing. Nor is the market kind to bargain hunters who will be (and probably have been) buying declining stocks on the assumption that they are finally cheap. IF we are in a bear market, these two groups will end up losing big time, providing the market for professionals to distribute marked up inventory.
The safest thing to do in a bear market is stay in cash. You can also go short. The proliferation of short ETFs and repeal of the uptick rule have made it so much easier.
Bear markets also produce relief rallies that can last anywhere from 1-3 months. You can make decent money buying breakouts during those short bouts of enthusiasm but your timing must be impeccable if you want to capture the bulk of the advance before it’s all over again.
The silver lining is that a bear market creates a clean slate: after a long decline stocks will eventually turn and start going up again. The key is patience. You will be crushed if you are premature with your optimism. We haven’t experienced real pain yet. Sure the $4.00 gas hurts but at least people still have jobs to drive to. Wait till they start getting laid off. So far skyrocketing energy costs have eaten into corporations’ profits. When companies finally start reporting losses and laying off people, that’s when real pain will start. We have accumulated too many problems that have been patched up but not resolved, and we need resolution to go forward. Resolution means pain.
I am confident the American economy will once again show its resilience and pull itself through the hard times. The investor’s goal is to get through unscathed, without giving too much back. If you don’t get burned you will be in top shape to implement one of Wall Street’s oldest adages: buying when “blood is running in the streets.” The time to get back in will be when corporations are reporting record losses and layoffs, the future is bleak, and the doomsday books are on Amazon’s best selling list.
Now, this is not a prediction, not even a scenario for what WILL happen next. More of a “mental bet”: IF we are in a bear market, this is what’s likely to happen, because it has happened in the past. It pays to be prepared.
Slav Fedorov is a full time stock trader and founder and managing member of TradingZoom, LLC – a provider of proprietary trading data that swing traders can put to work right away.
http://www.tradingzoom.com/
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