This Is What Happens When A Bear Market Shows Up

Includes: DIA, QQQ, SPY
by: Mycroft Friedrich

The reason it is so important to not be emotional when investing and only rely on the numbers is because many of your fellow investors on Wall Street simply do not have a clue of what they are doing, and are basically gambling instead of investing. They latch on to what they think is a good idea, but then invest without kicking the tires or looking what's under the hood. The reason I created Friedrich was to even the playing field for the average investor, so they should never have to experience what investors in this stock experienced on Friday:

Momentum investing can be very profitable if you get in at the right time, but in the end, can be extremely dangerous, as you are hoping that the company will continue giving Wall Street what they want to hear. Unfortunately for those investors in LinkedIn (LNKD), they found out that the LinkedIn Emperor really had no clothes and was actually standing there naked - and before they could sell, had their shares decimated, as high frequency trading computers evaporated billions of dollars from the stock in milliseconds.

It is important for every investor to do their due diligence on Main Street before anything else and only go to Wall Street and buy after their Main Street analysis has been completed and they have determined that they are getting a bargain. Luckily, our Friedrich Algorithm goes a long way in doing that for us, and in about 13 seconds, allows anyone using it to (in the great majority of cases) avoid such disasters. I have updated the introduction to Friedrich and you can find it here, so you can see the descriptions of the 34 proprietary ratios that I have created over the last 31 years in designing Friedrich to get him to this point. The Friedrich Algorithm can do in 13 seconds what used to take me one month to do by hand. Thus, I can upload 50 new data files a day and eventually have 1000s of stocks analyzed over time. As momentum plays get hammered, those on the margin get wiped out and then are forced to sell their other holdings, just to meet their margin calls. And with margin at all-time highs, it is even more dangerous now than at any time before.

As you can see, the S&P 500 Index closely follows the pattern of margin debt, so if investors start getting their clocks cleaned, then before you know it, the market continues its slippery slope downward, and those who bought without doing any research and who also bought on margin will find out real fast how dangerous it is to invest in the markets if you don't know what you are doing.

Why do I say we are in a bear market? Well, the level of losses since January 1st have been so fast and furious, and with Friedrich not being able to find anything to buy, I can only imagine as panic sets in and the margin calls come fast and furious that sellers will outweigh buyers going forward.

This, in the end, is no time to be a hero!