It’s hard to read the financial news these days without hearing the words “Bear Market”. Technically speaking, a stock is said to be in a bear market if it has dropped 20%. As of September 23, one analysis of the markets showed that 62% of small company stocks, 36% of mid-size company stock and 33% of large company stocks were down at least 20%. You might be tempted to think that maybe the worst is over. However, during the last cyclical bear, by the time the market hit bottom in March 2009 approximately 97% of these small, mid and large stocks were off by over 20%. In 2002 over 87% of large company stocks were off by over 20%.
The plain fact is that market movement is a cyclical phenomenon and the current cycle is 6 ½ years old. The weakness evident in the internal supply/demand statistics make the upside potential appear limited. I also feel that higher volatility is likely to remain.
Is There Any Good News Here?
Actually there is something good about a bear market: the chance to buy stocks in the future at very, very favorable prices. It’s difficult to know the right time to sell and the right time to buy back and what to hold in the interim. BUT there is no market opportunity much better than the first year after a crash or very bad year. I utilize various research regarding market statistics (such as Lowry’s Institutional) but it’s important to understand that this is not a defined event with a start day and an end day. There is a drawn out process of demand drying up and supply increasing. Various stocks and sectors become weak, one after another.
What About Bond Funds?
We still hold bond funds but they are not performing especially well. They have not been making much money because rates are so low. We hold them for safety more than income.
What are We Doing?
On one side, I view the risk reward relationship as very tilted toward risk. On the other, I cannot know timing and further, one can always be wrong on one or another level about what is actually happening. I have moved the accounts in the direction of safety by selling some stock funds. I have purchased a fund, the 361 Long Short fund which has shown great performance since inception. It has made good money in rising markets and yet only lost approximately half as much during the recent drop. I have also added to the 361 Managed Futures and Catalyst Hedged Futures Strategy. Both of these strategies have a history of making money in a bad stock market year, although the 361 fund did drop during the recent selloff.
If you would like to discuss your account, or become safer or more aggressive for your own reasons, please contact me.