In the last post, I provided the correct definition of a Bear Market. As I said, it has nothing to do with price, it has to do with the long-term trend of the market being in a down-trend, as opposed to an uptrend, which would be a bull market. And to follow Dow Theory, the “market” is judged by the Dow Jones Industrials and the Dow Jones Transportations. The charts for both can be found at the following links, thanks to Yahoo:
You’ll note that the DJIA is started a down-trend — it had a low that was below the last low and a high that was below the last high. The Transportations, however, have only had a lower low — the index has not moved up again. We therefore may be on the verge of a bear market. Being more cynical, looking at the longer-term 5-year chart for the DJIA:
you’ll notice that we haven’t yet gotten back up to the high reached back in 2008. This may suggest that we never emerged from the Bear Market that started back then, and the rally we saw was just a long and substantial bear market rally. Looking at the fundamentals, the debt crisis in Europe is certainly not good news for the market that thought it was finally going to see earnings rise out of the hole left by the housing collapse.
On the other side of the coin, however, the very, very low interest rates that the Fed has created must have an effect eventually, either causing growth or inflation. If the former occurs, the market may rally, debt crisis or no debt crisis.
What this all means is that we may be ready to see another retreat by the markets, possibly testing the lows set in 2009. While this might seem disheartening (no one likes to see the value of their investments go down), it actually presents a great buying opportunity for those with a long-term investment horizon. You see, when the market retreats, it takes all stocks, good and bad, down with it. This means that some great companies that have nothing wrong with them may be at fire sale prices soon.
So here’s what to do. If you have a long-term horizon (10, 20, 30 years) continue to invest regularly in case the market decides to rally and leave this bear market, but be a little picky about the prices you pay. If a stock seems a little pricey, maybe buy a little but keep some cash in reserve. Also, if you have a stock or two that has done well but has started to lose some of its luster, sell a bit and build some cash so you can take advantage of opportunities that may present themselves.
If you do not have a long-term horizon, for example, you are looking to retire in the next five years, build up enough cash to get you through the next 5-10 years in case the market decides to go down for a bit. You should also be shifting money from growth stocks to dividend paying stocks, bonds, and REITs – you actually should have been doing this for a while. It is always a good idea to keep cash in reserve that you will need in the near-term because it is difficult to judge anything about the market during short periods. Don’t take big risks with market volatility when you don’t have time to wait things out. But if you have the time, take advantage of the drops and don’t worry too much about the fluctuations.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.