Making Money Alert
Bear Market Survival Guide, Part II
10/26/2011
Stocks continue to their volatile trading, as the world waits for a decision from European leaders on the details of a proposed bailout of the region’s ailing financial system. Strong countries such as Germany and France are said to be closer and closer to a deal to backstop weaker countries like Greece and Italy Europe , it won’t change some of the bigger issues facing the current market. Yes, we may see a bounce in stocks on news of the deal, but that doesn’t change the fact that we remain in a wider bear market environment that needs to be dealt with if you want to preserve your capital and be a truly successful investor.
As I told you in last week’s Alert, from a technical perspective, many major markets continue struggling. Many global indices already have fallen into bear market territory, and the broad measure of the domestic market, the S&P 500 index, also fell into bear status briefly before the October rally resurrected its fortunes.
Still, the S&P 500 remains well below its long-term, 200-day moving average. Moreover, in August, we saw the short-term, 50-day moving average fall below the 200-day moving average, another technically bearish sign for the benchmark measure of the domestic markets. Of course, technical indicators aren’t the only reason for my bearish position here. We also have fundamental factors that could really weigh down this market, as well as sentiment factors that could keep investors hiding in the fourth quarter.
On the fundamental side of the equation, we’ve seen a slowdown in global economic growth, and especially in the once mighty
Finally, we have the sentiment factor, which is how people generally feel about stocks. In speaking to many investors, there exists a palatable sense of uncertainty and fear that stocks are just too wobbly right now. Nobody has confidence that our politicians in Washington
On the confidence front, we just received news that the Conference Board’s consumer confidence reading fell to 39.8 in October, its lowest level since March 2009. The downbeat mood of consumers reflects the big hit that the stock market took this summer, as well as frustration with an economy that doesn’t feel like it’s really recovered all that much from the pain of the Great Recession. Add up all of these variables and you have a bearish cloud hanging over this market. So now the question becomes, how do you prepare?
The first step is to recognize the situation for what it is. Once you do this, you can psychologically prepare for a downturn. In practical terms, this means that you must avoid taking any big losses in any one position in your portfolio. It also means that you must reduce your equity exposure to a minimum, as a widespread decline in stocks can chip away at your hard-earned assets.
So, my advice to you is to first recognize the economic environment we are in, and accept it. Once you’ve accepted it, you must take steps to avoid big losses, and to reduce your overall exposure to the equity markets. Taking these steps first will allow you to take advantage of the tactical trading opportunities in bear markets, opportunities that we’ll be discussing in detail in next week’s Alert -- so stay tuned!