The Characteristics of Bear Markets and what to Expect

[DarterBlue]

Background:

My basic thesis is that we are now in the early stages (second or third innings) of a bear market. While I am not clairvoyant, and have no idea how long it will last and how much damage it will do, I am deeply concerned that it may end up being at least as bad as the 2000 to 2002 and 2007 to early 2009 bear markets.

The first of these was caused primarily by a mania in start up technology stocks and was not characterized or accompanied by a severe recession or other such external features. It ended with the NASDAQ and NASDAQ 100 losing over 80% of their values and the DOW and S&P losing over 40% of theirs. During the final phase of the bull market that preceded the Dot Com bust, start up tech companies which normally would be in the second or third round of venture capital funding with at least a two to four year horizon to going public were not only taken public by the Goldman's and First Boston's of the day, but were doubling and tripling their IPO prices in the first day of trading. Normally such companies would be still reliant on VC funding at very punitive costs to their founders. Instead they were raising astronomical amounts of capital in public markets from crazed investors. In a sense, this was madness on the magnitude of the Tulip and South Seas bubbles of centuries past. In such an environment, it is hardly surprising that many fraudulent companies emerged, as they no longer had to meet the critical scrutiny of hardened, experienced Venture Capitalists in order to raise large sums of money. In hindsight, the subsequent carnage is as plain as day and should have been recognized as inevitable by even the most neophyte investor. 

The second bear market of this century was characterized by the a bursting of the housing bubble that led countless thousands of American famalies to lose their primary source of wealth, their equity in their houses. In it, housing prices ran way ahead of their true economic value fueled by the lax credit policies of financial institutions which were offering mortgages to anyone with a pulse without verifying that these individuals had the incomes to support them. The outcome of this madness was wholly predictable and resulted in all the major financial indices losing in the 50% range or higher of their values at their peak.

Both of the above bear markets fit the category of secular bear markets, which, as distinct from cyclical bear markets, do devastating pain to the portfolios of individual investors. Both, to my way of thinking, were precipitated by the deregulation of the financial industry that begun in earnest under the Clinton administration, which acquiesced to the desires of Wall Street and its lobbyists. It is not surprising that a broke Clinton at the time he left office, was generously rewarded for this by Wall Street and subsequently became wealthy beyond his wildest dreams. In addition, his daughter, Chelsea, was rewarded with a job at a major hedge fund. 

The above was provided as background to lend perspective to where we currently are as I believe that the current market is about to embark on a path similar in pain and duration to the other two bears of this century.    

Characteristics of Bear Markets:

Unlike bull markets, which are relatively boring, long lasting affairs, with very predictable pullbacks and thrusts to the trained eye, bear markets are wild, volatile affairs. In the words of Nicholas Darvas, Eastern European, intellectual, dancer and athlete, as well as skilled trader, "They are like the uncontrollable, tempestuous woman that most men dream of spending time with but to those that do it is at their own peril and usually end in their ruin." Spectacular rallies are followed by dramatic declines both of which result in a huge spike in volatility and in all instruments priced to capture changes in volatility. 

The reason of the huge increase in volatility is often blamed on the usual suspects: Short covering, program or computer trading, panic, etc. But in fact, the true reason is as old as time. It is the visceral fear experienced by those in deep peril of losing their lives, in this instance their financial lives. The best analogy is the reaction of a crowd in a theater or concert hall to the words: Fire. 

Each rally attempt in bear markets, particularly severe ones, are met with dramatic selloffs that serve to undercut prior lows. And with each new low, another group of investors cries uncle and gives up the fight in a flight to cash. This will be followed by either some good news on the economic front or calming words by politicians, investment gurus or by the Fed Chairman. This will result in sharp, huge rallies. However, such rallies end up being "bull traps" sucking neophyte investors in. They are then followed by vicious declines as the underlying reason for the bear markets becomes clearer with each passing month. 

In the early phases of bear markets, you will hear the following argument: The economy is in great shape, buy more as stocks have been marked down and are now cheap. My response to this is: the stock market is a discounting mechanism, current economic conditions have little to do with prices. It is the expectation of the future, positive or negative, that drives prices higher or lower. Usually, the underlying malaise driving current stock prices only becomes obvious months after the decline begins. 

My Advice for those that choose to Heed it:

Whether it makes sense to stay long, go short or move to the sidelines depends on a number of factors. The most critical of these is driven by your need for the money you have in the market over the next one to five years. If your invested funds will be needed in the near term to, say, fund your child's college education, pay for your daughter's wedding or if you are retired or plan on doing so within the next five years, you would be incredibly foolhardy to remain long in this environment. My advice to you would be to GET OUT. And I really don't give a damn whether you are friend or foe, bigot or broad minded. Do yourself a favor and save your capital. 

The second critical factor in determining your current course of action is your overall knowledge. If you know something of markets, have traded for awhile, or if you are a willing student, then you should consider going short or, if you are not comfortable shorting, going to cash and buying only in anticipation of counter trend rallies, when an oscillator of your choice indicates extreme oversold conditions. Such trades should be swing trades with entry and exits being done in a matter of days. 

If you must stay long, then at the very least you should consider writing slightly out of the money, covered call options against your current portfolio of stocks. For at least such a strategy will earn you some income to blunt the loss of value in your portfolio. 

You have been Warned:

Take the above from a veteran of life and of the financial markets. I know it will fall on mostly deaf ears, but felt obligated to dispense it anyway. 

[DarterBlue]

I decided I would bump this post up. My opinion and advice have not changed. Again, it will likely fall on deaf ears. But since I derive some pleasure from this message board, I felt obliged to bump it. 

It could be worth a large percentage of your net worth. I ask nothing of anyone here in return for the above advice. 

[ohio]

12 hours ago, DarterBlue said:

I decided I would bump this post up. My opinion and advice have not changed. Again, it will likely fall on deaf ears. But since I derive some pleasure from this message board, I felt obliged to bump it. 

It could be worth a large percentage of your net worth. I ask nothing of anyone here in return for the above advice. 

Here, this pie chart might give you a hint as to why it's falling on deaf ears.  Plus most people own mutual funds and very few on here trade.

 

 

[HSFBfan]

Your gonna tell me I'm wrong but this is one of the reasons why our stock market isnt going thru the roof. We are still connected to much globally. 

China takes a hit and now our stocks are down 300. We need to look at our companies are doing here and evaluate our stock market based on that. Were trying to hurt China economy. Cant let their shrinking economy hurt us

https://www.marketwatch.com/story/us-stock-futures-under-pressure-after-weak-china-data-2018-12-14

[ohio]

16 minutes ago, HSFBfan said:

Your gonna tell me I'm wrong but this is one of the reasons why our stock market isnt going thru the roof. We are still connected to much globally. 

China takes a hit and now our stocks are down 300. We need to look at our companies are doing here and evaluate our stock market based on that. Were trying to hurt China economy. Cant let their shrinking economy hurt us

https://www.marketwatch.com/story/us-stock-futures-under-pressure-after-weak-china-data-2018-12-14

Here's the thing... ever since nations have traded, markets have been influenced by events internationally.  For instance, if there was a drought in the Caribbean in the 1700s, sugar prices in England skyrocketed.  Or when there was an OPEC embargo in the 1970s, US oil prices skyrocketed.  Or if China started to put tariffs on our tech exports, then US stocks would fall and so on.

Now you might be thinking that if we were more nationalistic and less global, that the markets would be higher.  But there is a hole in that logic.  The main reason that our markets are so high is that our corporations can sell their products overseas.

Let me give you an example.  Apple's stock has risen immensely over the last two decades due to high sales of its products.  Today Apple's domestic sales are only 38% percent in the US, and the other 62% comes from global sales.  Do you think that Apples stock would be so high if it did not have global sales outside of the US.  Same goes for the other companies in the Dow Jones, the NASDAQ 100, the Russell 2000....

Without international trade our stock market would be a fraction of what it is today.

Just letting you know.

[HSFBfan]

1 minute ago, ohio said:

Here's the thing... ever since nations have traded, markets have been influenced by events internationally.  For instance, if there was a drought in the Caribbean in the 1700s, sugar prices in England skyrocketed.  Or when there was an OPEC embargo in the 1970s, US oil prices skyrocketed.  Or if China started to put tariffs on our tech exports, then US stocks would fall and so on.

Now you might be thinking that if we were more nationalistic and less global, that the markets would be higher.  But there is a hole in that logic.  The main reason that our markets are so high is that our corporations can sell their products overseas.

Let me give you an example.  Apple's stock has risen immensely over the last two decades due to high sales of its products.  Today Apple's domestic sales are only 38% percent in the US, and the other 62% comes from global sales.  Do you think that Apples stock would be so high if it did not have global sales outside of the US.  Same goes for the other companies in the Dow Jones, the NASDAQ 100, the Russell 2000....

Without international trade our stock market would be a fraction of what it is today.

Just letting you know.

Maybe not. But it would also be a lot more stable. You wouldnt have international news affecting us at all. and why oil is traded as a commodity on tbe open market is absolutely bullshit. 

[ohio]

6 minutes ago, HSFBfan said:

Maybe not. But it would also be a lot more stable. You wouldnt have international news affecting us at all. and why oil is traded as a commodity on tbe open market is absolutely bullshit. 

All commodities are traded internationally.  They have to be.

We both export and import oil so it has to be traded internationally.  Some items like coffee for instance, are only imported as we can't grow our own beans, so how would coffee not be traded internationally?

[HSFBfan]

Just now, ohio said:

All commodities are traded internationally.  They have to be.

We both export and import oil so it has to be traded internationally.  Some items like coffee for instance, are only imported as we can't grow our own beans, so how would coffee not be traded internationally?

I said they should not be traded on the open market. It can be manipulated. What's stopping people from jacking up gas and than when they make th e profits they are looking for tank it. And than do it again. 

The prices of these commodities should be regulated not openly traded 

[ohio]

2 minutes ago, HSFBfan said:

I said they should not be traded on the open market. It can be manipulated. What's stopping people from jacking up gas and than when they make th e profits they are looking for tank it. And than do it again. 

The prices of these commodities should be regulated not openly traded 

Regulated by who?

[HSFBfan]

Just now, ohio said:

Regulated by who?

That the part that would have to be figured out. But it shouldnt be touched by wall street traders 

[ohio]

Just now, HSFBfan said:

That the part that would have to be figured out. But it shouldnt be touched by wall street traders 

You do know that you are taking a communist position in your argument.

[HSFBfan]

1 minute ago, ohio said:

You do know that you are taking a communist position in your argument.

No I'm not because I'm not saying it should be left up to the government. That would be communist. But how can you have people openingly  trading commodities to whatever profits they want and than tank it whenever they want. 

If we have all this excess oil there is no reason for gas to still be 2.50 or more. Or to allow OPEC to say were cutting back on supply and than watch oil spike 4% in one day. It's all bullshit

[ohio]

1 minute ago, HSFBfan said:

No I'm not because I'm not saying it should be left up to the government. That would be communist. But how can you have people openingly  trading commodities to whatever profits they want and than tank it whenever they want. 

If we have all this excess oil there is no reason for gas to still be 2.50 or more. Or to allow OPEC to say were cutting back on supply and than watch oil spike 4% in one day. It's all bullshit

You don't seem to understand communism and socialism when it comes to markets.  It doesn't matter who regulates it: Government, an oligarchy, the mafia, the underground, a select group of people or what not.  It's still not capitalism.

Communists tried to influence and regulate the markets, just like you are suggesting.  Let's just say that it did not work out too well. Once you try to regulate markets, you will crash and burn.

Capitalism determines the price through supply and demand, not regulations by someone.

You are pro capitalism?

 

[HSFBfan]

Just now, ohio said:

You don't seem to understand communism and socialism when it comes to markets.  It doesn't matter who regulates it: Government, an oligarchy, the mafia, the underground, a select group of people or what not.  It's still not capitalism.

Communists tried to influence and regulate the markets, just like you are suggesting.  Let's just say that it did not work out too well. Once you try to regulate markets, you will crash and burn.

Capitalism determines the price through supply and demand, not regulations by someone.

You are pro capitalism?

 

Ok look at your last sentence. Supply and demand determines the price. That's true but at the same time as OPEC just did. They are not happy that their is all this oil out there so well shut down the supply and fuck everyone. How the hell is that good for anyone?

I am not a fan of OPEC at all. I dont rhink we should be a slave to them.

So whatever that makes me than so be it

[ohio]

6 minutes ago, HSFBfan said:

Ok look at your last sentence. Supply and demand determines the price. That's true but at the same time as OPEC just did. They are not happy that their is all this oil out there so well shut down the supply and fuck everyone. How the hell is that good for anyone?

I am not a fan of OPEC at all. I dont rhink we should be a slave to them.

So whatever that makes me than so be it

Yes, but if OPEC cuts back supply by drilling less and makes oil prices rise, then other countries will start drilling because there is a profit to be made.  As other countries drill more they will increase supply and the prices will start to fall again.  So, in the end it all balances out and oil and gasoline prices will once again reach lower level that is reasonable.

[HSFBfan]

2 minutes ago, ohio said:

Yes, but if OPEC cuts back supply by drilling less and makes oil prices rise, then other countries will start drilling because there is a profit to be made.  As other countries drill more they will increase supply and the prices will start to fall again.  So, in the end it all balances out and oil and gasoline prices will once again reach lower level that is reasonable.

Oil right now should be back near low 2s. Not close to 3. OPEC controls it all. That's why they are the richest countries out there and why we are finding ways to drill here. But because here are so damn soft they are not letting this countru drill in all the places we could 

[ohio]

1 minute ago, HSFBfan said:

Oil right now should be back near low 2s. Not close to 3. OPEC controls it all. That's why they are the richest countries out there and why we are finding ways to drill here. But because here are so damn soft they are not letting this countru drill in all the places we could 

So, who would determine this?

[HSFBfan]

1 minute ago, ohio said:

So, who would determine this?

There should be a formula. This much oil is available. Than gas prices should be this amount. Seems very simple. And get rid of every state has their own gas prices. That's another BS thing.

[DarterBlue]

1 hour ago, ohio said:

Here, this pie chart might give you a hint as to why it's falling on deaf ears.  Plus most people own mutual funds and very few on here trade.

 

 

Most households don't take advantage of the best game in town! Funny thing is many of these are the biggest supporters of capitalism when the way to get rich under capitalism is to be an investor. 

Talk about ironies!

[DarterBlue]

Just now, HSFBfan said:

There should be a formula. This much oil is available. Than gas prices should be this amount. Seems very simple. And get rid of every state has their own gas prices. That's another BS thing.

You sound more and more like a socialist! I would never, ever have believed I would hear some of this coming from you!! WTF?

[ohio]

Just now, HSFBfan said:

There should be a formula. This much oil is available. Than gas prices should be this amount. Seems very simple. And get rid of every state has their own gas prices. That's another BS thing.

LOL.  That's exactly what the communist countries tried to do.  Are you sure you are not a commie spy trying to undermine capitalism?  Lol 

[HSFBfan]

1 minute ago, ohio said:

LOL.  That's exactly what the communist countries tried to do.  Are you sure you are not a commie spy trying to undermine capitalism?  Lol 

Like I said whatever this makes me it makes me. These are my opinions. 

[HSFBfan]

3 minutes ago, DarterBlue said:

You sound more and more like a socialist! I would never, ever have believed I would hear some of this coming from you!! WTF?

Apparently I'm having a very bad day 

[ohio]

Just now, HSFBfan said:

Like I said whatever this makes me it makes me. These are my opinions. 

These types of opinions have bankrupted communist nations.

[HSFBfan]

Just now, ohio said:

These types of opinions have bankrupted communist nations.

It is what it is. Like I said I knew I would be called wrong. I anticipated that from the start. My opinions are not going to change the way things are traded or whatever.