Is This the Start of a Bear Market?

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Includes: DIA, QQQ, SPY
by: Roger Nusbaum

A reader left a "quick question" as to whether I thought a bear market has started or if this is just a correction. Well, the question might be quick but can the answer be quick?

First, I would say that my hunch is no. It seems to me that bear markets do not start as dramatically as what just happened last week. I said the same thing about the Q1 dip as that one unfolded too. Anything is possible, of course, but for now I say no bear market.

I wanted to answer the question concisely up front but I have to say I think it is the wrong question - at least for me it is the wrong question. The way I view it is that demand for stocks is either healthy or it isn't -- here I am saying the market above or below the 200 DMA (red line below) is the tell for how healthy demand is.

spx

If there is a problem with demand it makes sense, to me, to be defensive and when demand is healthy it makes sense to be more invested. (By the way, demand for stocks is healthy the vast majority of the time.)

To be clear, there are times where the 200 DMA gets it wrong, and there are several other ways that other people gauge market health. I am not saying the 200 DMA is the only way, and it may not be the best way.

For you managing your own portfolio, it probably is not necessary to worry about animal adjectives to describe the market. I also don't believe it is necessary to outguess the next bear market or correction. If you own stocks you have to be willing to endure "down a little". Right now the S&P 500 is not down anywhere close to the 10% that usually defines a correction, so still "down a little" - very little really.

My approach is simply to be invested most of the time, stay reasonably close to the market over time and try to miss a big portion of down a lot. For people who have saved enough, this is sufficient and means that unreasonable risk does not need to be taken.

The market goes up enough over time to give people who save properly enough money when they need it, so people do not need to take on as much volatility as it seems like they do. Further missing a chunk of one "down a lot" in your lifetime can add nicely to your average annual return.

This sort of approach or view of the market is difficult for a lot of people to grab on to. Ken Fisher talks about how human beings are not wired for investing, and I think this is part of it. People seem to want to make big bets on volatile parts of the market and often do so with poor timing.

The building block for this is that if you save properly, stay in equities and never take defensive action you have good chance to having enough money. In that context, the things I write about are my effort to simply give clients a smoother ride to that end.

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