Saturday, March 26, 2011

Bull or just a longer-term Bear

Great question - Are we in a long-term Bear market, and if so when will it end?

Bull and bear in front of the Frankfurt Stock ...Image via WikipediaI ran across this draft in my blog roll this weekend which I meant to write-up and publish back in July of 2009 - related to the article at the WSJ - Is This Bull Cyclical or Secular?  My initial take then was it is very likely, and now I'm more convinced we have been in a long-term bear / sideways trading market.

As the WSJ article suggests and several related articles below we are indeed in a longer term Bear market, and while the current sentiment is my mind we haven't turned the corner quite yet. There is too much geopolitical unrest to act as a catalyst to jump us past the old highs. Additionally it will not be possible to create significant GDP growth given the Eurozone and US have such a high unemployment rate. The bull markets of the past, and especially the one in the 80's/90's had a large percentage driven by consumers...guess what if we have a big unemployment rate consumers aren't going to be spending! And as you can see below both the US and Eurozone are still at 9+% unemployment rates. Couple the current economic state, the unrest in the middle east and the unusually calmness it is tough to see how we get away from high unemployment.
Images via Wikipedia of Global unemployment with detailed maps of the Eurozone and USA

So, if we are indeed in a long-term bear market...

The question remains how much longer? A number of cases and evidence can be found to suggest long-term bears tend to operate in 18 year cycles. From the chart below you can easily see the swing of longer term bear and bull markets. You can also look back to the 1800's and see similar trends. Once a longer term bear market begins it generally lasts 18 years, though some are quite longer. Now, there are also a few cases that show bull and bear markets are shorter (see Bull and Bear market durations), though it seems even with smaller cycles they are part of either longer term bull or bear markets. 

Given this information I would suggest we become better investors and not pick from the thousands of ETF's. Instead I would suggest we as individuals do our own fundamental and technical analysis to choose the right stock(s). Related I would suggest you pick a number that you feel comfortable you can easily keep up with on a weekly basis. If you pick too many you will not be able to stay up to date on their current fundamentals or technicals. Now that said you can not only pick one or two stocks ... if you do this you wouldn't be diversified and that can be equally bad. A good place to start is by looking at the S&P sector spiders website. From here you can quickly get a sense of the major sectors which comprise the overall market.  Do not just look at the Dow30...they do not make a good representative slice of the overall market.

Finally once you have done enough research to know what companies are doing well, and that you want to invest your money, do yourself a favor and investigate options. Options are definitely not for everyone and must be well understood before you jump into them. Once you do understand you can use these akin to insurance to protect your investments, or when in a longer term bull or bear use them for speculation. So, if you do understand options, but just aren't sure all of this is really might consider a strangle on the S&P. I for one am treading carefully in my portfolios and am being very picky about where I invest my cash. At the same time I have opened a strangle on the SPY because I just am not 100% convinced we are going anywhere soon. In the interim I will keep my SPY strangle and be selling OTM puts and calls to reduce my cost basis until there is a clear direction.

So, in closing be wary of the talking heads both positive and negative...nobody knows where we are going in the next few months, or if we have a few more years in this sideways'ish market we've had since 2000 when the last long term bull market ended.

Related articles

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