Investors Column – Bear Bubble or Bull Recovery?

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August 15, 2022 by Scott Crosby - Views: 106

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Investors Column – Bear Bubble or Bull Recovery?

If you have seen your investments sink to a low in mid-June, but then climbing out of their depressed state ever since, you are surely asking, “Is the recession over?  Can I start buying stocks again?”

S389-1.jpgThe answer is, “Probably not.”

It is always difficult for anyone – even experts – to define a low-point as the bottom.  To say, in effect, “Now we can start investing in a growing economy again.”  

Seeing an economic trend at its earliest stages is virtually impossible.  There are no reliable, hard-and-fast indicators.  There are many indicators, and they vary in relative importance and accuracy as circumstances evolve.

The increases in stock values seen since mid-June through the end of July – during the recession – have a number of “colorful” names:  “suckers’ rally”; “bear trap”; “dead cat bounce”.  Beware, and be patient.

Bear-market rallies are short-tem events.  They last only a few weeks, or even just a few days.  

Bear market rallies then fall quickly – and usually further than ever.  A true recovery lasts months, or even years.

Pundits and expert investors disagree on whether we are in a bear trap, or are seeing an actual turnaround towards a new bull market.  The White House, of course, defines the state of the economy in the best light that is to the President’s advantage.  Don’t bet money – or buy stocks – based on what they say.

How do you know what you, as an investor, are seeing, and what you should do?  Three commonly-used indicators of a bull market are good to be aware of.

First, it is a good sign when most stocks (90%) are trading above their ten-day average.  Ten days is two weeks; if the S&P 500 increases for two solid weeks, that is a good sign.  Look for news about this indicator.  Do the research.

Second, more stocks will be advancing than declining for that same two-week period.

Third, a majority of stocks are setting new highs.

These three indicators sound great, but if you wait for these kinds of results, you are not participating in the rally.  You are not making money.  

A successful aggressive investor needs to move more quickly to take advantage of a bull market.  

Last month’s column mentioned one strategy to use during a decline:  sell five pr ten percent of your portfolio at a time, putting that money aside.  Several weeks later, repeat that process, and so on.  

If you are convinced that the market has hit bottom, that an upswing is not a sucker’s rally, test the waters:  use five or ten percent of your cash to buy stock, preferably in more than one company.  

If you made a mistake in your timing the market falls once again, your loss will be smaller.  But if several weeks later, the market is continuing its upswing, use another five to ten percent of your available cash to buy more stocks.  

If the market continues to show growth, repeat this process every few weeks, mirroring your selling process on the downturn.  

This approach also gives you the opportunity to continually review the status of the operations of prospective companies; i.e., more research to improve your knowledge base for making decisions.

If there is a downturn in a bear market, your options are the same as always:  sell, or hold on to your stocks through the decline.  If you did good research, and hold stocks in good companies, this will be a difficult choice.  Do you build up a supply of cash to use later on, or do you just hold on to stocks which you know are good?  Either choice can be the best answer.

Above all, how you as an investor behave during a downturn is the measure of a good investor.  Downturns scare many would-be investors away from investing – especially those who have never experienced a bear market.  Having only experienced a bull market, they think success at investing is easy.  

Quitters are losers.  Bear markets are a fact of life.  Your bear-market strategies will be one of your tools to investing success.  

Winners are those who make the most of a downturn, learning the techniques needed to survive, confident in their ability to minimize losses, and aim to emerge in a better position than ever when recovery brings the next bull market.  Recessions and downturns are where an investor’s mettle is truly tested.  

Investors are effectively self-employed; they cannot blame the boss for their mistakes.  They have to have the determination and persistence to see their investing career be successful during both bull markets and bear markets.

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