Making Money Alert
An Introduction to Bear Market Surivial
10/19/2011
The big surge in stocks so far in October has many investors hoping that this rally is the start of something really big. A near-12% surge off of the September lows in less than three weeks, combined with what is traditionally considered the beginning of the growth season for stocks, has the bulls feeling pretty good about their chances for a continued stampede.
The reality of the situation is that despite the big move higher in domestic stocks, when you look at some of the biggest global indices out there, it looks more like a bear market than anything else. Yes, the October rally has been impressive. But as I said last week, I think it’s likely a case of going up too far, too fast.
The way I see it, not many investors are worried about the current price levels in global stocks, and they seem to be oblivious to the severity of the fundamental problems in the economy. First, let’s tackle the technical issues and see why my bent is leaning toward the bear.
The three charts below show how far we’ve come down in each respective market segment since each hit their most-recent highs. The first chart is the Vanguard Total Market VIPERS (VTI), which is the measure of all stocks traded on the U.S. markets. The second chart is the iShares MSCI EAFA Index (EFA), a measure of publicly traded securities in the European, Australasian and Far Eastern markets. Finally, we have the iShares MSCI Emerging Markets (EEM), which is a basket of emerging market companies from China, Brazil, India and 20 other emerging market economies.
As you can see from all three charts, the current price of each fund is well below its long-term, 200-day moving average. This level represents significant technical resistance that’s hard to fight through, even during the most ardent buying frenzies. Moreover, we saw in August that the short-term, 50-day moving average fell below the 200-day moving average, another technically bearish sign for these markets. Finally, each of these funds fell into official bear market territory in September, declining more than 20% from their previous highs.
On the fundamental side of the equation global economic growth has stalled in developed countries, and is slowing down significantly in emerging markets. This contraction of economic activity is recessionary. Even though we have yet to see negative growth numbers out of Europe, the slowdown in the global economy means that we are moving in the wrong direction.
Without getting into too much detail, the debt crisis in Europe, the political acrimony in the United States and the contracting markets in Europe, China and other emerging markets are ominous signs. These setbacks mean fundamental headwinds are likely to blow back any bullish sentiment in stocks.
I want all Alert readers to recognize the economic environment we are in, and accept it. Once we accept the potential for a continued global bear market, we can prepare accordingly. My dad, Dick Fabian, taught me a long time ago that the key to succeeding in a bear market is survival. In bear markets, it’s all about keeping the majority of your investment capital intact. It’s about maintaining your net worth so that when the skies clear up, you’ll have the capital on hand to put money to work.
In the weeks to come I’ll be writing more on how to survive a bear market. But for now, this introduction to bear market survival should serve you well. As they say, the first step in conquering a problem is recognizing there is one. In this market, the problem is that a looming bear is ready to maul us.