First of all, let me state the obvious: We are in the throes of a wretched bear market, that will probably take us down 50% or more from the peak of Dow 14,198 before it’s all said and done. Looking further ahead, if I were to fathom a guess, 2008 (duh!) and 2009 will be downers for the equity markets, as will at least part of 2010.
At this point, my best case scenario is that we trade back and forth in a wide trading band through 2009, and get into 2010 before we see the cyclical bull rear up again.
My worst case scenario is Dow 5,000 or S&P 500 500. No, I didn’t repeat myself. The 500 level could come if the 2002 low of 769 on the S&P doesn’t hold. Just know that people are talking about a test of the 2002 lows, and if so, it just might get tested……. similar to an Obama presidency. But let’s not go there right now.
Today’s, market gayness serves as an example of how stocks are simply trying to recover in this bear market, and what can happen when they try. There’s nothing new being started under the sun. Not just yet. As long as people have hope of a recovery, hope of a bottom being formed, or just plain hope, the bear market isn’t over.
Bear markets are all about grinding you down to dust and spitting you out. Your goal is to survive, all the while belligerantly giving the finger to Mr. Bear Market. However, just remember, you can’t use the same old bull market strategies in a bear market.
In the same vein, I caution you about getting overly excited when things start to run up, so you don’t get your hopes up. The temptation is to get all lathered up when the market begins to run, and furiously start putting on all kinds of trades like some whacked out Marco Polo. Then Attila the Hun shows up with his poleaxe and, well, you know what happens next.
Perhaps it would serve you well to remember that, in a bear market, recovery rallies get sold. That is the basic rule of thumb to live (and survive) by. And, 900 point recovery rallies in one day? Damn, that’s a good one to two week recovery. Heck, you can probably figure out what will happen shortly after that.
Capital preservation is the name of the game. Live to fight another day. So make sure you have a quick exit (stop loss) handy when your positions show a profit. Oh, and guard your mustache, too.
A bear market is no time to get greedy, contrary to what Mr. Buffett may espouse. Holding on to a profit for too long gets you right back to where you started, or even less.
Bear markets rip greedy people to shreds. Take profits early and often. The idea that you’ll miss out on a huge run up on a stock if you sell out with an early profit, will often get you in trouble. Realize that stocks have trouble just making it back up to their 50 dma. (In fact, you can probably reduce the 50 dma price by about 30% of the potential range of the move and that would be a reasonable near term target on a rally off a consolidation bottom).
What I would suggest, and what I’ve done personally, is to divide up my pool of money into different,…pools. (Sorry, it’s late and I couldn’t think of a different metaphor). Go back to the basics, the fundamentals and asset allocation. Basic football. Blocking and tackling.
You need a pool of cash, a pool of solid defensive, dividend-paying stocks or bonds, and you need a pool of money that is running and rotating in and out of the current leaders. You use the cash to either hedge with options or inverse ETFs, or to park money for the next opportunity run. That’s how I would do it.
More on how you structure that, what should be on the watchlist and what you buy, tomorrow. It’s getting late and I’m running out of steam.
Adios, and buenos noches, muchachos.Comments »