Sometimes a Bear Is Just a Bear

That was a foul day for the market yesterday with all sorts reasons cited as to why, but I don't think I heard the reason that makes the most sense to me, which is that there was no reason.

Sure the Goldman comments, oil, the dollar, some earnings news and the like were negatives and obviously contributed, but I think the story is simpler than that.

I have been saying the same thing for ages; this is a bear market (a normal one in my opinion) and bear markets go down a lot over long-ish periods of time.

Often the fundamental catalysts for bear markets have similarities, but the market action is very similar time after time.

So far in this bear there have been a couple of nice feel-good rallies which have so far ended up getting unwound. While there has been denial on the part of some market participants about the bear, there has also been a real fear of how different this go-round is. Both sentiments contribute to my opinion that this will be normal.

One recurring comment I have made for many months is how textbook this bear market is turning out to be. While big declines often trigger an emotional response, I would think people prone to emotion might find solace in the textbook nature of the decline.

For ages, I wrote about thinking ahead of time about what a bear market would look like, and what it might do to a diversified portfolio. The idea was that by thinking about and realizing that at some point the market will endure a bear market again, and that when that happens stocks will go down, and doing that thinking at a time when markets are doing well, allows for an emotionless plan of what to do. At the very least, it lessens the emotional response.

I try to do this with clients and I think it has helped. I also wrote about planning an exit strategy ahead of time and then sticking to it when things hit the fan. If you've done this, then you have probably avoided some pain and are prone to fewer panic sells.

If you did not do any of this on the current go-round, you will get the chance in the next bear market. The reason I've written about this so many times over the life of this blog is for periods like right now. Market cycles are inevitable. Planning ahead of time for defensive action is easy to do and does not require being right about about too many things.

I said ahead of time that the market warns investors when demand becomes unhealthy. If demand is unhealthy, then it makes sense to expect that to be bad for equity prices. This process probably seemed very simplistic when I first wrote about it (here is one link from 2004 on the subject) but you can decide for yourself the effectiveness. I would add that while I do this quite faithfully in my practice, I didn't come up with any of it - the point being that anyone can do it.

I guess the take here should be keep it simple; do what you have to to remove emotion (i.e. plan ahead); and be disciplined.

Comments

[LarryH]

There is absolutely nothing about our current situation that is "textbook." We have never before had the confluence of high energy prices, inflation in general, collapsing house values, consumers over their heads in debt, opaque financial institutions, money supply out of control, rising taxes, etc., etc., as we have today. Buyer of this attitude beware!

[TA]

Ya, ya it's so horrible, sell everything run away. You and all the other chicken littles out here.

Every other bear people freak out and then after they say 'that wasn't so bad'. It's human nature, get over it.

[crimfunk]

Just hedge your long positions dollar for dollar with SDS, TWM, QID and you will be fine.

[ICouldBeWrong]

Nice article, I agree we are in a textbook bear market.

It's amazing how similar the recent market action (last 6 months) has been to the market action in 2001. Almost a carbon copy tracking it week to week. We seem to be at a similar position now to late Feb 2001.

Don't get me wrong, the causes are different this time (credit and energy crisis more similar to the 70's than the dot com bubble). But it's amazing to me how the last 6 months of this crash has essentially been a carbon copy of dotcom crash Jun2000-Feb2001.

I guess at some point they must diverge, surely it can't continue being this easy to make money?

Anyway still short the S&P500, long the Yen (finally seems to have found support at the 200dma), with a small dash of selected commodities added to the mix. Will be interesting to see if oil has made a genuine break out above $140 a barrel.

Hmm, Oil hasn't quite broken out yet when measured in Yen. So close though. So close.

[syndicat]

Yes, this is just another bear. Look at 3 past bears:
1929-1933...cause: excessive valuations and leverage;
1973-1974...cause: excessive valuations and oil;

[syndicat]

Part 2, another bear:
2000-2003...cause: excessive valuation
2007-?........cause: leverage, oil

Excessive valuation might be added as a factor to the current bear market if we consider that financial company earnings were greatly inflated by gains in the last few years that are now being written off.

There is nothing new. Reminds me of the time when Samuel Goldwyn saw a sundial on one of his movie sets. He asked what it did and was told that it allowed people to tell the time from the sun. He replied; "what will they think of next."

[TA]

It was only financials(not the rest of the market) and write ups will occur next year to balance some of the bloodletting going on right now.

If anything is different, excessive valuations are(were) NOT part of this market. Because of that and if we get a decent downdraft everyone is expecting, one could say that once the smoke clears, this was a fabulous time to buy. Waiting for an 'all clear' will of course be too late.

[secmaven]

So tell us what to short and when if the bear is so obvious!

[CLH]

You say each time we have a rally its taken away from us. I say each time we bottom its no lower then the last one. Three bottoms all the same. Bears are running out of ammunition. There is only so much fear. It will soon disipate and the shorts will cough up blood.

[ICouldBeWrong]

secmaven: Sorry my 'surely it can't continue being this easy to make money?' was misleading. I had a good week last week. Personally even with the similarity to the 2000-2003 bear, I still don't find it easy to consistently make money in the markets month after month, it's hard work and somewhat hit and miss in my experience. Maybe I should have taken a profit at the market close on Friday.

Having said that if the market rallies to 1290-1310 on Monday morning New York time I will consider that a reasonably good opportunity to short more. If such a rally occurs on Monday, and we continue to repeat the 2000-2003 bear then we should hit 1150 before we hit 1400, (in fact we shouldn't see 1400 again for several years).

But that's assuming we continue to rhyme with the 2000-2003 bear. A better risk/reward opportunity is to wait until the S&P500 rallies to say within 5% of the 200dma (with a stop set say 12% above the 200dma). The 200dma should provide strong resistance, but this setup could take several months to occur (about 3 months if we rhyme with the last bear, and at about where we are now ~1300) and hence will require more patience.

Another note, I would like to hedge every short position with a long position. (e.g. to hedge against hyper-inflation) so I might go long some more commodities.

[ICouldBeWrong]

CLH: I expect we will see a new S&P500 low (below 1250) soon, probably within 2 weeks. We've just seen a new 52 week low in the Dow Jones Industrial Avergage (admittedly the transports are holding up better). I don't know if you follow the VIX, but the way I read it, it's not showing much fear currently. More like complacency.

What if oil has broken out of the trading range between 130-140 a barrel and is heading higher? What if it hits $150 a barrel this week, then I think we will see fear.

[blink0404]

Hey Roger Nusbaum fans,

Here's a link to an Roger Nusbuam interview with Chip Hanlon on greenfaucet.
www.greenfaucet.com/no...

They discuss the market and why Nusbaum thinks there could more downside for stocks to come.