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Opinion: Stocks Are Bullish Right Now, But These 9 Painful Stages of This Bear Market Aren’t Even Halfway Through


The official definition of a bear market is a drop of 20% or greater from the index’s previous high. Accordingly, the three main benchmarks of the US stock market – Nasdaq
COMP,
+ 1.00%
,
S&P 500
SPX,
+ 1.19%

and the Dow Jones Industrial Average
DJIA,
+ 1.13%

– they are all in a bear market.

Based on my work with stock market strategist Mark D. Cook, a typical bear market goes through nine stages. Right now we are in Stage 4. Remember that bear markets do not always follow these phases in the exact order.

1. Unsuccessful demonstrations: The failed rallies present the first clues that a bear market is here. Failed rallies often occur before the “official” market becomes a bear market. If the rally has no legs and fails to move higher in the next few days or weeks, that confirms that the bears are there. Along the way, many failed rallies will fool the bulls into thinking the worst is over. Watch rallies for bear market clues. The rally so far this week is an example. Now in its second day, the failure of this rally will confirm that the stock has yet to exit the bear market.

2. Low volume rallies: Another clue to a bear market is that stocks move higher on low volume. This is a clue that large financial institutions are not buying, although there may be hedge funds and hedge funds. It’s easy for algos to push prices higher in low volume environments, one of the reasons monster rallies go nowhere the next day (i.e. a “one-day wonder”).

3. The chart looks terrible: The easiest way to identify a bear market is to look at a stock chart. Needless to say the charts look horrible, both daily and weekly. While protests help relieve some of the pressure, they usually don’t last.

4. Strong sell-off: It’s been a few years since the market experienced extremely strong sell-offs, but that record was broken the week of September 26 when the S&P 500 hit a new low for 2022. The sell-offs. This robustness is typical of a bear market, followed by rallies. didn’t last long (a roller coaster so far took place during October).

5. Mutual Fund Acquisition: During this period, after reviewing their quarterly and monthly reports, terrified investors threw towels and sold their mutual funds (also, some investors refused to see the that report). As a result, mutual fund companies are forced to sell (which negatively affects the stock market). Typically, when indexes drop more than 20%, the amount of a mutual fund’s buyback increases.

6. Complacency turns to panic: As more and more investors’ money leaves the market, more investors panic. The most optimistic investors are keeping life dear but are buying fewer stocks. The most anxious investors will sell to avoid risk with precious profits.

7. All news is bad news: When a bear market pushes stock prices lower, it seems that most economic data and financial news are negative. Many have become skeptical of bullish predictions from market experts, who had previously promised that the market would continue to go up. In the depths of the worst bear markets, some bulls are mocked or ignored. Even the bulls are growing increasingly nervous as the market moves further and further down (with occasional rallies along the way).

8. Gaur throws towels: When trading volume increases on down days and some investors lose 30% or more, they give up hope and sell. Markets go free for all as even the Fed seems to have lost control. Many media outlets acknowledge that a bear market has arrived.

9. Capitulation: After weeks and months of selling (and occasional rallies), many investors are panicking. Investors realize that it can take years before their portfolio returns to breakeven, and that some stocks never will. During the final phase of the bear market, trading volume was more than three times higher than normal. Even some true believers liquidate positions, as many portfolios drop 40% or 50% and more. Almost every financial asset fell, with the exception of fixed income like CDs and T-bills. Margin traders or investors feel the most pain.

Read: Morgan Stanley warns ‘Material risk’ looms over equities as investors face bear market ‘second action’

Act

This bear market is relatively young, but there have been so many failed rallies that many investors are too scared to buy. Some investors with cash are looking for bargains, but they need nerves of steel to buy when everyone is selling.

One of the keys to success in the marketplace is buying things that people don’t want. Here are some ideas on what to do (and it’s not too late to act):

  1. In a bear market, the key to survival is diversification. If you are patient and willing to hold positions for many years, the average dollar cost of entering an index fund will decrease.

  2. In the early stages of a bear market, consider moving to the margins with CDs or Treasury bills.

  3. Consider building a strong cash position, although inflation will cut some of those gains. However, losing to inflation is still better than losing 30% in the stock market. The goal is not to lose money; In a bear market, cash is king.

The length and volatility of each bear market is different. No one can predict how this will play out, but based on previous bear markets, there is still a long way to go.

Sincere Michael (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks”. His latest book, “How to Make Profits in the Stock Market” (McGraw Hill, 2022), explores bull and bear market investing strategies.

Than: Could there be a stock market rally? Maybe. Will it be the end of the bear market? Sure is not.

Also read: Whatever you feel now about stocks is normal bear market pain – and the worst is yet to come

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