How to navigate a bear market
First things first: get used to it. The statistics have been astonishing lately. New lows swamp new highs, the put/call ratio has reached its highest levels ever, breadth figures are off-the-charts negative, the fear/greed index is very low and the VIX has been spiking.
Meanwhile, bonds continue to rise and oil, copper and other commodities are sinking lower with deflationary winds blowing. The stock market is down 7% or more for 2018. This bear market may last awhile.
Here’s what to do:
Get used to analysts calling a bottom
And then ignore them. Every single time markets take a turn down, someone says, “This is it!” The process of reaching a bottom takes time, so any calls for the bottom now are premature.
Be careful trading rallies
Rallies can be traded, but they require some gut-wrenching decisions, luck and timing. Tread carefully.
Be prepared for sharp, FAST drops
Just look at the action during this wretched month of December. Often cited as the friendliest month of the year, the SPX 500 has had only two up days out of fifteen, and one was a measly three points. The index is on pace for its worst month since the financial crisis, and the worst December since the Great Depression!
Don’t buy dips!
To complicate things, we have been conditioned to buy dips over the past several years. It’s time to un-learn that behavior. it took a few years following the global financial crisis for investors to trust that a rally would follow a dip. We are no longer trading in that environment.
Where is this bear market headed?
Interest rates started to climb in 2016 and have not looked back. This has become a challenge to equities. The yield curve has flattened and may invert, which often presages a recession down the road. Business conditions have weakened somewhat, and the uncertainty around issues such as trade and interest rate policy have pushed investors to lock down gains and head to the sidelines. While the indices are not technically in a bear market, most stocks are down 20% or more.
When will the bear market end? That’s not a question that can be answered easily or with any precision. When the last of the dip buyers decide they are done trying to catch a falling knife, then we are closer to the end. But that’s not likely to happen any time soon.