A Market of Bears

A Market of Bears

By Ilene

We’re already in a bear market, but don’t panic.

Stock markets go up, down and sideways. The declines can be minor (corrections) or severe (bears!!).

The most significant declines are called “bears” because they feel a little like being mauled by a bear. A bear market is arbitrarily defined as a 20% or greater correction. Like with real bears, there are different varieties of market bears. Consequently, predicting the right hand side of a chart (future) based on the left hand side of the chart (past) is interesting but flawed. While many commentators provide lists of “if/then” relationships, those should probably be replaced with “if/maybes.”

My thesis is simple: It’s been a horrible start to 2016, but the weakness in stocks began months ago. Most stocks are already in or approaching bear market territory. As Joshua Brown notes in The Global Bear Market Has Already Begun:

Meb Faber tweeted yesterday on the topic of country stock markets, as he follows them closely as part of his Global Value strategy…

In a 39-page report overnight, UBS technical analysts Michael Riesner and Marc Müller make the case that the global stock market is already in a bear market and that the few remaining soldiers still on their feet will eventually fall. These last few un-corrected markets – Japan, US large caps and European Small/Mid caps -may run on a bit further, but the seven-year cycle demands an end to the bull that began in 2009.

There’s a lot of nuance to the call, of course, but the below introductory paragraph covers the basics. One thing I should mention – I read technical notes from all over The Street and from among my friends in the financial blogosphere every week. I can’t remember the last time I read a bullish one.

And Julie Verhage at Bloomberg reports that while the major US indexes may not be in a bear market, The ‘Average’ Stock Is Already in a Bear Market.

The S&P 500 is down just over 7 percent from its May high, but the average stock in the larger S&P 1500 was down 24 percent from its high as of yesterday’s close, according to new research from Bespoke Investment Group.

Chuck Mikolajczak also notes that For many stocks on Wall St, it’s already a bear market. “With U.S. stocks now on pace for their worst start to the year since 2000, investors are questioning whether Wall Street is headed for a bona fide bear market. The truth is, many stocks are already there. U.S. stocks have fallen nearly 4.0 percent so far in 2016, and more than 40 percent of the stocks in the benchmark S&P500 stock index are 20 percent or more off of their highs, the definition of a bear market.”

So let’s say we are already in a bear market, what do we do now? First, don’t panic. Panic feeds on itself and results in bad choices. In Crash Rules Everything Around Me, Ben Carlson at A Wealth of Common Sense writes,

[In] the headlines we see words like plunge, turmoil, plummet, disaster and destroyed. The panic feeds on itself and people start believing the hype. So people inevitably make mistakes, throw their plan out the window and become traumatized by market corrections and crashes. These periods become seared into the memories of investors even though they’re a natural part of the ebb and flow of market cycles.

[…]

Crashes, corrections, drawdowns, losses, system resets or whatever you want to call them are a feature of the financial markets, not a sign that they are broken. These things have to happen every once and a while for the system to function properly and wash out the excesses. It makes sense to learn from them and you definitely have to mentally prepare yourself for dealing with losses. But the infatuation with down markets can be taken too far when loss aversion begins to cloud your judgment.

Today, Ben shares his 10 Bear Market Truths. Before you sell all your stocks, I suggest reading the whole article. Excerpt:

A few truths about bear markets in stocks:

1. They happen. Sometimes stocks go down. That’s why they’re called risk assets. Half of all years since 1950 have seen a double-digit correction in stocks. Get used to it.

2.  They’re a natural outcome of a complex system run by emotions and divergent opinions. Humans tend to take things too far, so losses are inevitable.

[…]

10. These are the times that successful investors separate themselves from the pack. Most investors mistakenly assume that you make all of your money during bull markets. The reason so many investors fail is because they make poor decisions when markets fall.

Read more: 10 Bear Market Truths.

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