Investing – Preparing for the Next Bear Market


Read the investment tea leaves

What do the ‘Tea Leaves’ tell us, “The sky is falling?” No, wait, shake the cup again… “The sky’s the limit?” This is the answer we want!

If investing and trading were this simple, we could visit a reader for a few dollars and find out exactly what the future holds. Unfortunately, if you ask three readers what their sheets say, you get three totally different professional opinions. Consistency is not their forte.

First of all, I have never made any public prophecies regarding the future direction of the economy or the market and I have no intention of starting now. Plus, I’m not a stock bear, I’m not a bull, I don’t have silly buttons to smack that make all kinds of goofy noises to tell you to buy – buy – buy, and my game of Darts really is a dartboard and not a stock picking device. I don’t think Chicken Little was ever a good predictor and I don’t think the world will end tomorrow. But 25 years of experience watching the markets tells me that there are some things individual investors should definitely be concerned about.

Let’s filter out the widespread and sensational noise about each current market tick, up or down. We’ll leave that to the Talking Heads with their TV cameras and cup of tea leaves; it gives them something to do and keeps them from boring us. We want to focus on the big picture, major events and how those events are likely to affect the economy and ultimately the future direction of the market. I hope you can get a glimpse of what might happen and how you can prepare.

Let’s look at some of the main factors.

For example: unemployment, foreclosures, the housing market, the mortgage crisis, the dollar, the EU and gold, to name a few.

It’s not Rocket Science, common sense says the housing market won’t improve until foreclosures are no longer a problem and foreclosures will continue to be a problem until unemployment improves . With 25% of homeowners currently upside down on their mortgage (owing more than the value of the property), the light at the end of the tunnel for foreclosures continues to be attached to a large moving object with a very loud hissing sound.

As you may know, the mortgage crisis didn’t just go away. This means that all those unwanted mortgages that have been packaged and exploited for the unsuspecting, have not been paid in full by the lucky owners, the money is still owed; there was just a small tweak in the accounting method so they look better on paper now. Let’s move on to another indicator.

With housing, mortgages and foreclosures in the background, now think about the price of gold. As you know gold is on a tear and continues to hover around $1400 an ounce. You must be wondering, what would cause this? Realizing that supply and demand ultimately determine the going price, the obvious increase in demand for this precious metal is probably not because your dentist has been extremely busy filling cavities or your jeweler predicted an increase in traffic during the holidays. So that really only leaves one logical conclusion. Worry about the currency, the green back in particular, and more specifically, its value. Forget the few novice traders who buy gold at current prices hoping the price will double overnight and they will get rich quick, if they don’t lose their money there they will lose it elsewhere. It is their destiny. What concerns us is the big picture. And the big picture tells us that’s not a good indicator for the economy, to say the least.

There’s an old adage that goes, “If you want the truth, follow the money.”

Aside from currency issues, worried investors stealing gold, or Mr. Bernanke and his proverbial helicopter handing out greenbacks to everyone but you and me, what do insiders do?

You know the ones that should be “Aware” and get an idea of ​​what the economy is likely to do and what effect it will have on the market, not to mention what effect it will have on their company’s stock price. I might add that I find it interesting that giant corporations like Microsoft, Hewlett Packard and others have recently made headlines by scouting and hiring the best economists away from places like Harvard. Why would they develop such a sudden interest in economics professors?

Besides that, let’s see what the real insiders do with their actions.

Insiders, of course, are a company’s officers, directors, and major shareholders. Those with direct insight into orders, sales, projections, etc. They are also required by law to report almost immediately to the SEC whenever they have bought or sold stock in their company.

Well guess what? They have been on a selling spree. Selling the shares of their companies at a record pace not seen since the beginning of 2007. Let me remind you that it was only a few months before the start of the Great Recession.

Vickers Weekly Insider Report analyzes insider data each week and calculates a ratio of the number of shares these insider executives sold this week to the number they bought. According to Vickers Weekly, over the past four decades (40 years), this ratio has averaged between 2 and 2.5 to 1. Any reading above 2.5 to 1 is an above average selling rate for insiders, and should also be an eye-opener for the investor.

Now keep in mind that these insiders were selling at a record pace in early 2007 and hold your breath before you read what that sell-to-buy ratio was in the second week of December 2010. 7.07-to-1. In other words, company insiders globally sell more than seven shares for each one they buy. Just to show that this is not an anomaly, just two months ago the sell-to-buy ratio was 5.29 to 1, and it has obviously increased since then.

Bear markets are another factor that the individual investor should keep in mind when thinking about the “big picture”. I know, nobody wants to think about the market collapsing and sucking the average 29% of your investment account value, then having to wait a few years to break even. But like it or not, over the past 100 years there has been a bear market on average every three and a half (3.5) years. They come like clockwork, last an average of 18 months, and then let investors wait a few more years for the investment account balance to return to black. Need I remind you that the last bear market started in 2007? You do the math.

So what should you do? I’m not suggesting you call your broker and sell, and I certainly don’t mean to sound like Chicken Little, that’s not my style. But I believe you should pay close attention to stock indices, tighten stops, prepare for the worst and hope for the best. When I wrote the books “Charting and Technical Analysis” and “Common Sense Investing”, this current market scenario is exactly what I wanted to prepare the individual investor for. And more importantly, how to avoid the dredge of portfolio decimation caused by market declines. Another very important thing to remember is that your financial advisor will never tell you to sell. Safeguarding your investment dollars is your sole responsibility. So educate yourself on investing and learn how to make your own investment decisions or keep your hard earned money safe in the bank. It’s up to you.

Source by Fred McAllen

Comments are closed.