Wednesday, April 13, 2011

BEAR Markets

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I mentioned in my previous post that I did not believe we have started another bull market.  There are a couple of reasons for this.  I posted a while ago about Mr. Craig Alexander's (Senior VP and Chief Economist at TD Bank) take on the economy.  During his presentation, he said something I found of great interest.  He said in assessing our recovery we had to compare it,  not to other recessions, but to other financial events of the past.  In that regard he felt we were on track as far as a recovery from that type of event was concerned.  Whether we are or not, it made me realize there is a difference between what we should expect during this recovery and one that follows a normal bear market. 

Incidentally, research has shown bear markets occur on average every four years and last for an average of one year.  If you look at the data, however, you will see the frequencies and durations for bear markets are all over the map.  They can be only a couple of years apart, or they can be ten years apart.  They can last for a few months, or they can go on for years.

If Mr. Alexander is correct, and we are not looking at the average recovery after an average bear market, with which I would have to agree, the above chart becomes rather fascinating.  What makes it particularly interesting is the fact the percentage in change in weekly index values is derived from inflation adjusted numbers.  What that means is the recent markets peaked in the year 2000, and not 2007, as we might otherwise believe in observing unadjusted charts.

While not the same indexes each time, two of the three indexes combine to create definite up and downward trends.  If that continues, then most of the next two years in the stock markets, starting almost any time now, will be lower, rather than higher, as most of the academics and vendors of equities would have us believe.       

Do I think we are headed lower?  In the short term, yes.  It doesn't make a whole lot of difference in my case.  I play a trend until it ceases to be one.  So, even while the longer term trend may be down, there could be opportunities for me to take advantage of a shorter up trend.  For people with a longer term investing horizon, the decision as to what to do is more complicated.  In 1998 I had a rather large (for me) pension adjustment which I wanted to invest.  I put the whole thing into a good mutual fund at the beginning of the year.  By the fall I had lost almost one third of my investment.  Nobody had suggested to me that was even a remote possibility!

Based on my experience, I would not invest any of my money in mutual funds today.  Mutual fund managers will try to minimize losses in a down market, but they cannot avoid them.  For the longer term, I would only invest in a broad index based Exchange Traded Fund (ETF) like XIU and watch it very closely.  I would set a maximum daily, weekly, and monthly loss limit and sell if I attained any one of them.  I would only try to reenter the market once the market direction regained an upward trend.  The problem with this approach is my portfolio could end up dying a death of a thousand cuts - enter the market, lose, sell, enter the market, lose, sell... .  Since I have little faith in the longer term, what I would most likely do is shorten my investing horizon to a much shorter term.

I am not an investment professional, so I cannot advise you in what to do with your money.  What I would recommend is being very careful.  History would seem to indicate things could get a lot more worse before they get a lot more better.

Do you think we are currently in a new bull market?

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