The Way Of The Bull And The Bear

by: Eric Parnell, CFA


Investors are seemingly more anxious as the markets become more calm.

Regardless of the investment path you are following, we all share the same goals.

While we cannot predict the future with complete certainty, the one constant we know is change.

Those investors that maintain openness in their strategy and have established a thoughtful path for the short-term, intermediate-term and long-term are best positioned for success and happiness in the end.

"Those with no concern for the Way;
Those temporarily lost on the Way;
Those diligently seeking the Way;
Those who know, but are unable to follow the Way;
Those who simply live the Way;
For all of us are one."

--Leo Buscaglia, The Way Of The Bull, 1973

I have been struck in recent weeks by the seemingly inverse relationship between capital markets and the mood of those investors that are participating in them. For while markets including stocks have entered into a period of almost eerie placidity, the tension among investors across the philosophical spectrum appears to be rising. But whether you are following the way of the bull, the bear, or somewhere in between, it is important to remember that we are all on the same path in the end. We all wish to grow the value of our capital over time while protecting against the risk of loss. And while not all of us can dictate the direction of the market on any given day, week, month or year, we can embrace the fact that certain principles will always be true about the markets in which we participate. If one can maintain the openness to listen with patience, maintain a rich texture in our thought processes and avoid becoming overly reactive with our conclusions, we provide ourselves with the best opportunity for success and happiness in the end.

The quiet that has descended on investment markets appears to be driving many investors to distraction. Given the fact that markets are open each and every business day with up to the minute price quotes streaming across our screens, the impulse to desire more noise and to take action is understandable, particularly given the fact that we have witnessed three major bull markets and two devastating bear markets over the last quarter of a century leading up to this moment.

The wide dichotomy of investor emotions today is notable. Those that are eager to get long are anxiously awaiting the next entry point that seemingly never arrives. Those that are already long may be anticipating the next major breakout that has been largely elusive thus far this year save a short spurt in late May. Others that are already long may be nervously bracing for the next major correction that may seem long overdue five years into a graying bull market supported by a sputtering economy. And those that have either never believed or no longer believe in the integrity of the rally since early 2009 stew with increasing frustration as the market continues to set new highs. All of these investor emotions are brewing at a time when the markets have gone almost completely still. For example, it has been 49 trading days now since April 16 when the stock market as measured by the S&P 500 Index (NYSEARCA:SPY) has experienced a daily move in either direction in excess of 1%.

In many ways, today's market has become one that is depriving all investors of what they believe they want right now. But it is giving all investors the one thing they may need more than anything else as we look out into an uncertain future, which is time. Time to think. Time to plan. Time to execute.

"The only thing that is certain for us is change. To battle change is to waste our time; the battle can never be won. To become the willing ally of change is to assure ourselves of life."

--Leo Buscaglia, The Way Of The Bull, 1973

None of us know what the market is going to do tomorrow. We know with absolute certainty what it has done in the past. We are navigating what it is doing at any given moment. And we can try to project with varying degrees of success what will happen in the future starting with the next trading day. But we cannot predict the future with full and complete certainty. Sometimes we will be right. Other times we will be wrong. And moments will take place when we are very wrong no matter how hard we try. Such is the uncertainty of what has yet come to pass.

But the one thing that we do know will occur with complete certainty is change. Things will not stay the same forever. When the financial crisis took hold and markets started descending lower in October 10, 2007, the one thing we knew with complete certainty is that the bear market would eventually come to an end. What we did not know at the time, however, was when it would end and how the market would respond once it was over. And while it ended up being both a bit shorter, but also quite a bit deeper than many were likely anticipating, it finally came to an end on March 9, 2009. Since that time, we have entered into what has been one of the longest bull markets on record to date.

Just as with the bear market that preceded it, we also know one thing for certain about the current bull market. It will eventually come to an end and the next bear market will follow it. And once again, the key question that has so many investors transfixed today is when it is going to end and how the market will respond once it is finally over. These concerns are particularly pertinent for most investors given the fact that today's bull market already ranks among one of the longest on record at a time when the primary crutch that has supported today's bull market literally from the day it was born in the form of monetary stimulus is now in the process of being removed. Thus, all investors, whether they are following the way of the bull, the way of the bear, or any path in between, are facing the potential prospect that change may be imminent. And the fact that this prospect may be drawing increasingly close at a time when markets have gone eerily quiet only adds to the unrest. For just as the world around us goes completely quite just before the outbreak of a major thunderstorm, the markets have gone startlingly quiet. Perhaps some noise will return just as it did in 1994 and the bull will continue on its merry path. Then again, perhaps the skies will open just as they did in 2007 and the bear will mark its return to the investment landscape with a vengeance. Only time will tell.

"As long as we have hope, we have direction, the energy to move, and the map to move by. We have a hundred alternatives, a thousand paths and an infinity of dreams. Hope-ful, we are halfway to where we want to go; hope-less, we are lost forever."

--Leo Buscaglia, The Way Of The Bull, 1973

We know that change is inevitable. Eventually, we will have to say goodbye to the current bull market and hello to the next bear market. What then should we do if anything in preparation for this change? And what should we expect once this change finally takes place?

Each individual investor has their own unique path in how they intend to navigate today's investment markets. Some will prove more fruitful than others, but the beauty of capital markets is that it can validate tomorrow those that feel wrong today while still validating those that feel right today. More important above all else is maintaining a direction with the energy to move and map to move by surrounded by a sense of hope that everything will turn out all right in the end. Centuries of history have brought us to this moment, and the human spirit has always shown the resilience to prevail no matter what hardships have been set before us along the way.

The following is just one path of many to follow as it relates to the U.S. stock market and those that are highly correlated with it. Perhaps you may find it useful. Then again, perhaps another path is more suited to your journey. But this is the path that I have chosen to follow with the openness to change along the way.

In the short-term, I am following the Way Of The Bull and remain net long the stock market. The uptrend in the U.S. stock market remains firmly intact. And while I know that today's bull market will eventually come to an end, few definitive signals exist at the present time that any such change is imminent at this moment. This does not mean that I am not continuing to watch the markets daily for any such warnings that stocks are about to enter a new path as soon as tomorrow, but as long as stocks remain in the bullish moment, it is the path to follow. This also does not mean that I am throwing caution to the wind with my long stock positions, however. In order to manage against the risk of loss, I am emphasizing lower volatility stocks (NYSEARCA:SPLV) with a particular concentration on utilities (NYSEARCA:XLU), REITs (NYSEARCA:VNQ) and those stocks from more defensive sectors that have a proven track record of consistent annual dividend increases (NYSEARCA:SDY). I am also holding more cash on reserve than I might otherwise.

In the intermediate-term, I am following the Way Of The Bear and remain diligently on watch for the earliest indications that today's bull market is finally reaching exhaustion. Recognizing the difficulty in changing paths at the right time along with the broader market, I am dedicating a great deal of time understanding the variety of conditions that often come together in the moment when this change finally starts to take place with the hope that I have already evolved my strategy onto the proper path in traveling the journey. I also recognize that the longer the current bull market runs, the greater the imbalances will have been created that will require cleansing, and thus greater and/or longer the market is likely to fall in the subsequent bear market. Strategies will be available to capitalize once this bearish change has taken place. These include an increased allocation to long-term Treasuries (NYSEARCA:TLT), precious metals including gold (NYSEARCA:GLD), volatility (NYSEARCA:VXX) as well as selected options strategies, and increasing the cash reserve. But since I am not yet fully following the Way Of The Bear at this moment, many approaches remain at the ready for greater use only when the time is finally right.

In the long-term, I will be following the Way Of The Bull. After more than a quarter of a century of heavy management by monetary policy makers, the economy and investment markets are now badly in need of cleansing given their inability to properly recede and correct due to repeatedly aggressive policy responses in an effort to try and engineer the business and market cycle. This purging process is likely to be painful once it is either allowed or is forced to take place as the bear takes hold. But once it finally occurs, we are almost certain to find ourselves at the dawn of a new secular bull market just as we did in 1921, 1949 and 1982. Once this new morning arrives, it will be the time to once again establish dedicated long positions in a broad array of companies with the intent of holding them without interruption for the foreseeable future. While this new day for financial markets is likely at least a few years away and will depend on the allowances of policy makers in the meantime, it will be a most glorious time for investors when it comes to pass. It is the hope for all of us to look forward to in the end.

"To turn your back on even one person, for whatever reason, is to run the risk of losing the central piece of your jigsaw puzzle."
--Leo Buscaglia, The Way Of The Bull, 1973

As you move forward in today's ongoing bull market, keep an open mind to listen to all of those around you, even if they share a view that is decidedly different than your own. In the inn of financial markets there is room for everyone. And by not becoming too dogmatic to your own beliefs and maintaining an openness to receive the thoughts and ideas of others, it will likely serve to strengthen your own process even if you strongly disagree with these views. For all of us are one, and the stronger we all are in our investment processes, the greater the chance we all have to realize success and happiness in the end.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met. The author is long SPLV, XLU, TLT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. I am long selected individual stocks including REITs. I also hold a meaningful allocation to cash.