May 14, 2014, 12:58 p.m. EDT
Stocks are telling you a bear market is coming
Opinion: Expect a choppy, sloppy end to the six-year bull run
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MIAMI (MarketWatch) — This is how bear markets begin.
Two months ago, I pointed out that the U.S. stock market had topped out and was going through a churning process.
Since that observation, the Dow Jones Industrial Average DJIA -1.01% has risen a bit higher but the Nasdaq COMP -0.76% and Russell 2000 RUT -0.65% indexes have dropped below their 50-day and 100-day moving averages. It’s only a matter of time before the Dow follows.
Bond yields may signal a warning
Yields on 30-year Treasury bonds have fallen this year, which could be a signal that economic growth will not heat up anytime soon.
Bear markets start with a whimper or a bang. When it starts with a bang, the first clue will be a major break in the market that no one can correctly explain. That will eventually be followed by a correction (or crash), and everyone will know that something bad has happened. The indexes will fall by double digits, investors will panic, and stocks get slaughtered.
Investors will be told to stay calm and not sell — but they will when the financial pain gets too great. They are also told that the market always comes back (although not all stocks will). Anxiety turns to fear as the market plunges. After a correction or crash, investors look for scapegoats while commentators ask, “Who could have known?” (Hint: Those willing to act on the clues and indicators were out of the market well before the most damage was done.)
But when a bear market starts with a whimper, it confuses nearly everyone. A meandering, volatile market is frustrating. At first, bulls are hopeful that the market will keep going up, but eventually, the market tops out and retreats.
I call this “death by a thousand pullbacks.” Instead of new highs, the market will make a series of short-lived but painful pullbacks. At first, the buy-on-the-dip investors will enter the market with new orders. As the bear market continues, the buy-on-the-dip strategy will stop working (along with most other long strategies).
Typically, a market making new highs is a healthy sign. In a looming bear market, new highs on lower volume is a red flag. That’s happening now. Also, leading technology stocks have gotten smashed, replaced by new leaders. After these new leaders fail there will be nowhere to hide.
Confusion and illusion
You may have noticed that some financial analysts on television seem confused. One week they make a bearish prediction, then reverse course. This is typical as the market transitions to a bear market.
Many commentators are confused because what has worked in the past stops working. Also, the behavior of other assets such as bonds and commodities don’t make sense. That’s a clue the market is entering a danger zone. Another red flag: Investors are buying stocks on margin at levels higher than in the previous peak years of 2008 and 2000. Whenever margin reaches excessive levels, bad things happen to the stock market.
Short-term, the market could churn higher. As prices rise, a lot of people will be fooled, especially if the Dow continues to make all-time highs. Many investors will not sell because they think they can either get out in time, or buy and hold through the next pullback or correction. The most aggressive investors will buy on the dip because stocks “are so cheap.” I’ve heard some financial commentators recommend that retail investors avoid a bear market by being “better stock pickers.” Ridiculous.
Here’s some advice: Rather than trying to be a stock-picking genius, before a bear market shreds your portfolio, think about getting out of the market even if you’re early. I’d rather give up 5% potential upside than risk 20% downside (or more).
Right now, the strongest case for the bulls is the Fed. And yet, in the history of the stock market, no institution has been able to prevent a bear market. You can’t fool Mother Market.
Waiting for the pivot point
Eventually there will be a pivot (or inflection) point, and the market will snap. No one knows what the catalyst will be. It could be an economic event, a geopolitical crisis, or a spike in interest rates.
When the market snaps, nearly everyone but the biggest believers will realize the market is in trouble. By that time, there will be a mad rush for the exits as everyone attempts to sell at once.
No matter how many times you tell investors to be wary of a dangerous market, most don’t listen. Based on the clues, indicators, and personal observations, crunch time is getting closer. No one knows when, but I am certain: a bear market is inevitable — sooner rather than later. This is not doom and gloom. It is market reality.
Michael Sincere (www.michaelsincere.com) is the author of “Understanding Options,” “Understanding Stocks,” and “Predict the Next Bull or Bear Market and Win.”
April 8, 2014, 6:02 a.m. EDT
8 ways to save your portfolio from this toppy market
Opinion: What to do with your money as stocks take a turn for the worse
MIAMI (MarketWatch) — By now, you may be concerned about the likelihood of a stock market crash, correction, or a pullback. Although you don’t want to overreact, you also don’t want to be blindly bullish.
In an early March column , I cautioned that the market looked toppy. More indications have since appeared. For example, the tech-heavy Nasdaq has been hit especially hardas investors sold high-flying stocks with absurd valuations. It feels like a mini-1999.
The market is at a major crossroads. The bulls believe stocks will rise even higher while the bears think the market is exhausted.
What's driving market losses?
Steve Wood, chief market strategist at Russell Investments North America, joins the News Hub to talk about the stock market’s decline. Photo: Getty Images.
What should you do? In this unpredictable, volatile market, here are eight strategies to consider:
1. Wait on the sidelines in cash
Cash (which includes a money-market fund) has a bad reputation because returns have been essentially nonexistent. But temporarily sitting on the sidelines in cash makes sense when the market is in a danger zone, as it is now. Patient investors on the lookout for new opportunities will be glad to hold cash that can be put to work later at lower prices.
2. Don’t ‘buy on the dip’
Buying on the dip makes sense in a bull market, but when the market trend goes south, buying after the market swoons can be hazardous to your wealth. For example, buying high-flying tech stocks on the way down is risky now. These stocks are going down for a reason — we won’t know why until later.
3. Talk with your broker or money manager
This is a good time to review what you own and whether you are protected from a correction ora bear market. If you own too many overvalued stocks and have profits, maybe it’s time to take some gains.
4. Scale out of stocks
Consider scaling out of winning equity investments. When the market is vulnerable, the last thing you want is for a profitable position to turn into a loser.
5. Test the market
One clever strategy is to measure the market or leading stocks by purchasing a small number of shares. If you are wrong, sell. If you are right, keep adding to your winning positions. It also makes sense to buy a handful of put and call options to gauge the market’s direction.
6. Use short-selling strategies or inverse ETFs
Although shorting is primarily for experienced traders, consider non-leveraged inverse exchange-traded funds. Shorting strategies are not easy because the market tends to have a bullish bias. In addition, the Fed can show up at any moment to make dovish comments and obliterate your profits.
If you do short, take profits quickly. (Hint: Many short-sellers see a bulls-eye on the market right now, and are waiting for the opportunity to sell short. If you aren’t comfortable shorting, don’t worry. You’ll have a chance to buy popular stocks at bargain prices in the future.)
7. Use stop losses or mental stops
To lock in profits (or reduce losses), use stop losses or mental stops. Even more important, write down the buy price, the potential sell price, and a price to get out if you are wrong.
8. Buy protection
If you’re experienced, consider hedging with put options. Although this strategy is not for everyone, using puts as a hedge is an effective way to minimize risk. The downside is that buying protection is not cheap (it’s similar to buying insurance). To use this strategy, you must be willing to give up some profits for protection.
As the market turns, it doesn’t mean a crash or correction is imminent. In fact, this topping out period can last a long time.
That said, market conditions are dangerous and will remain so for a while. Given the evidence, market indicators are saying, loudly and clearly, buyer beware.
March 7, 2014, 6:30 a.m. EST
7 signs we’re near a market top, and what to do now
Opinion: Wall Street is reliving the 1960s — but the ‘Go-Go’ era is ending
Remember March 4, 2014 — a day that will go down in Wall Street history as the beginning of the end for this latest bull market, which is about to celebrate its fifth birthday.
On March 4, the Dow Jones Industrial Average DJIA -1.01% rose 227 points based on a report that Russian troops were pulling back from Ukraine’s border. This “news” lit the market on fire, a sign that the market is heading into a mania stage where it doesn’t take much to boost stocks.
Buffett or Icahn: Whom to invest with?
Both Warren Buffett’s Berkshire Hathaway and Carl Icahn’s Icahn Enterprises had banner years in 2013, but which billionaire is the better guide for investors? Barron’s Andrew Bary tackles the question on MoneyBeat. Photo: Getty Images.
Indeed, nowadays instead of the “Nifty Fifty” stocks that defined the late 1960s market, we have the likes of FacebookFB -0.21% , Tesla Motors TSLA +0.13% , and Chipotle Mexican Grill CMG +0.02% — the new new things.
Can the market go higher? Sure, although the higher it goes, the more dangerous it becomes. Often, during the latter stages of a bull market, the market separates itself from reality and appears to be on another planet.
Such red flags are everywhere:
1. Retail investors have been pouring money into stock mutual funds. The fear of missing out on the sixth year of a bull market has created something close to a buying panic. Although not as maniacal as we saw in 1999, the stock cheerleaders are back and rooting for their stocks and mutual funds to go higher — just like they always do before a crash or bear market.
2. The Investor’s Intelligence survey is concerning. The closely watched II survey shows a low proportion of bears (less than 20%), which some have pointed out is the lowest proportion since just before the 1987 crash.
3. Sentiment indicators are pessimistic. The VIX, the put-call ratio and other major sentiment indicators suggest that investors and traders are getting complacent. Apparently, market participants believe that the Fed, or their fund manager, will protect them in a worst-case scenario.
4. Fundamentals are being ignored. Obscenely high P/E ratios are passed over, along with soft economic readings (i.e. GDP and ISM). When the fundamentals are weaker than expected, the weather is blamed.
5. The stock market crash of 2008 has been forgotten. Investors forget, but the market never does. Those who do not heed the lessons of the past will once again learn a painful lesson.
6. The Nasdaq is soaring. The three-year chart of the NasdaqCOMP -0.76% has gone nearly parabolic, hitting a 14-year high of 4,351 on March 4. It’s the Go-Go years all over again. (And that late 1960s bull market ended with the 1973-74 bear market.)
7. Fear and greed are taking over. When the market reaches the tipping point (and we’re getting closer), investors and traders buy “ATM” (anything that moves). The fear of missing out causes a buying panic.
What to do now:
There have been numerous crash predictions over the last five years. As a result, many investors have closed their ears, and who can blame them? The market has ignored the warnings and continued to go up. One thing about crashes: They can’t be predicted (but it won’t stop people from trying). However, it is possible to recognize a dangerous market, which is what we have now.
The market is wearing no clothes
Just like the emperor, the market is wearing no clothes. Right now, many people see only what they want to believe. It’s been a long time since investors felt full-throated fear, and many have forgotten what it feels like. The panic to buy will be replaced by the urgency to get out at any price. No one can know what will cause perceptions to change, but they will.
At the moment, emerging markets are in deep trouble, and what is happening in Ukraine didn’t help. Nevertheless, the CEOs of several major brokerage firms have urged investors to “go long” emerging markets because they are so “cheap.” Once again, these well-educated salesmen are wrong. Emerging markets will recover one day, but not soon. Urging investors to buy on the dip is disgraceful.
Sit and wait?
If we are in the mini-mania stage of the bull market, the market will continue to go higher based on rumors, hope, and greed. Sitting on the sidelines and waiting for the bull market to top out takes tremendous discipline. Trying to capture that final 5% can be costly if you get the timing wrong (and most people do). Be prepared for increased volatility as we get closer to the end.
Of course, it’s not easy to sit on the sidelines when everyone else seems to be making money. Although many investors are dreaming of another 30% return this year, the odds are good that it will be a difficult year. Yes, during a mania stage anything is possible, but with each passing week, the clock is ticking.
Those who have studied market history have seen this story before, and the ending is always the same. No matter how many warnings you give, no many how you urge people to avoid buying the speculative Go-Go stocks and move to the sidelines, few listen until it is too late.
Michael Sincere’s newest books, “Understanding Options” (2nd Edition) and “Understanding Stocks” (2nd Edition) have just been released by McGraw-Hill. Sincere’s website (www.michaelsincere.com) uses indicators and clues to determine if stocks are in a bull or bear market.
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