A Bear Market Will Bend Your Mind

As we try to make our way through this vicious bear market, it’s a wonder how many continue to try and catch a bottom. Every single time markets take a turn down there is some positive comment made that ‘this is the time’. Green shoots. Remember that one during the financial crisis? The process of a bottom takes time, and while rallies can be traded, they require some gut-wrenching decisions, luck and timing. Those are great to use in a casino, but not trading/investing.

2018 bear market

Make no mistake, markets do go down – and they go down FAST. Don’t believe me? Check out the action during this wretched month of December. Often cited as the friendliest month of the year, the SPX 500 has had only two up days out of fifteen, and one was a measly three points. The index is on pace for its worst month since the financial crisis, and the worst December since the Great Depression!

The statistics of selling lately have been astonishing. New lows swamping new highs, put/call ratio reaching highest levels ever, breadth figures off the charts negative, fear/greed index at lows and the VIX spiking – all while bonds continue to rise as oil, copper and other commodities sink lower with deflationary winds blowing. Meanwhile, we have a stock market that is down 7% or more for 2018 in what appears to be a bear market that may last awhile.

So, if the momentum is/has been rolling downhill, why not stay on the trend? Because over the past several years we have been conditioned to buy dips. That has been the action since just after the financial crisis, when confidence was completely shattered. It took years before investors/traders could ever trust a rally to follow through. With a generous accommodation from the Fed with low interest rates, why not buy stocks here in the US? Strong growth, earnings and the only game in town.

Rates started to climb however in 2016 and have not looked back. It’s becoming a challenge to equities. The yield curve has flattened and may perhaps invert which often presages a recession down the road. Business conditions have weakened somewhat and the uncertainty around issues such as trade and interest rate policy have pushed investors to lock down gains and head to the sidelines. While the indices are not technically in a bear market, most stocks are down 20% or more, certain big numbers substantially higher.

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