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Wake Up: Stocks Are In A Bear Market, So Sell Something

Bear market headlinesGetty

Stop waiting for the headlines – it will be too late. This is a bear market, with no traces of bull left except in investors’ minds. That means this recent Fed-rate and Trump-tariff rise is Bull Trap #3. Unlike #1 and #2, however, a drop from here will likely be vicious, comparable to previous bear markets’ wake-up calls. Here are five, intertwined expectations (risks):

  1. An outsized reversal erases the latest run-up and hopes of a bull revival. That plunge serves as…
  2. Proof that the bear market has strong forces that are irreversible by even the Fed and White House. Recognition of this fact causes…
  3. A breakthrough of the weak downside barrier, exposing another, larger air pocket than before. Looking for causes, the discussion then focuses on…
  4. Recession, interest rate inversion and global economy slowing. Those serious, seemingly unhindered issues spread to newspapers’ front pages and the forefront of investors’ minds, initiating…
  5. Emotional decision making by investors, the “strategy” by which the actions of “sell low” by the frightened many and “buy low” by the calm few is accomplished

At that point, a no-fooling, “where’s the bottom?” bear market is recognized by all – driven by fundamental negatives, an ugly technical picture and heightened, emotion-driven price volatility.

Don’t follow Cramer’s and others’ advice to buy “recession-proof” stocks

Looking for “safe” buys is the normal, bull-focused investor’s downfall. Similar is the grass-is-greener wandering into bonds, commodities, real estate, etc.

If you want to remain a stock investor, just stop believing in the “stay fully invested because you cannot time the market” mantra. Instead, be content to hold cash reserves, awaiting opportunities. Doing so gives the added benefit of having a more relaxed, objective, unemotional view of the stock market as prices whip about, producing false hope, then dashing it with another downward dive.

Still want to invest? Consider selling short

For the courageous, selling short is a viable investment strategy. Doing so is neither overly risky nor anti-American. It is simply investing with the trend, which happens to be down. Doing so does require turning bullish thinking on its head (sell high, buy low), but the potential quick gains make that effort worthwhile.

No or limited experience, or just rusty from the long bull market? Then, read or reread Harry Schultz’s Bear Market Investment Strategies by Harry D. Schultz (first published in 1981 by Dow Jones-Irwin). Previously, he wrote Bear Markets: How to Survive and Make Money in Them (1964, Prentice Hall), but I prefer the 1981 book.

(By the way – Do NOT dismiss this book because it was written 37 years ago. The stock market’s driver is human thinking, reactions and emotions. Moreover, I have found throughout my 50+ years of investing that older books reveal their worth more clearly than topical ones do (plus, most investing books end up in the bargain bin because they offer little or no worth).

Harry Schultz’s bear market booksJohn Tobey

Note: Even if you decide not to sell short, Schutz’s book is important to read now. I do so whenever the market runs into an extended downtrend. The book helps shake the mind from its focus on the question, “When will stocks rise again?” Schultz explains how to examine a downtrend without feeling it is simply a bull market abnormality (and maybe a buying opportunity?).

The bottom line

This is a bear market, so we must take defensive actions like selling. The fundamentals, technical picture and potential emotional deterioration do not support the market’s current level. So, selling stocks and selling short look to be the best strategies now.

Note: I have been writing about this bear market since October 17. See the article list here.

Disclosure: Author holds primarily cash reserves

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