Opinion: The Dow and the S&P 500 are likely falling into a bear market but your portfolio doesn’t have to sink with them


After talking to my neighbors about the Nasdaq shares they own, I found that most do not want financial advice. So I will offer it here.

The Nasdaq Composite Index COMP,
-4.29%
is in a bear market. To be specific, the Nasdaq hit an intraday high of 16,212 on November 22, 2021. Anything below 12,970 on the Nasdaq represents a 20% drop from that high. On May 6, the Nasdaq closed at 12,144, well into the bear market territory. The charts of some long-time market lovers like Meta Platforms FB,
-3.71%,
Apple AAPL,
-3.32%,
Amazon.com AMZN,
-5.21%,
Netflix NFLX,
-4.35%,
and Alphabet (Google) GOOG,
-2.23%
it looks scary.

Chances are now that both the Dow Jones Industrial Average DJIA,
-1.99%
and the Standard & Poor’s 500 SPX,
-3.20%
will follow the Nasdaq in a bear market. If the Dow falls below 29,561, it will technically be in a bearish market (a 20% drop from its all-time high of 36,952 on January 5, 2022).

If the S&P 500 falls below 3,854, it would technically be in a bear market (20% less than its intraday high of 4,818 on January 4, 2022).

Long way down

If the bearish market forecasting models are correct, there is a long way to go before the US markets hit rock bottom. Don’t be surprised if the S&P 500 sinks to 3,200. This is not a prediction, it is an educated conjecture based on historical trends and technical analysis.

I was educated in bear markets by the late Mark D. Cook, who warned for years that the U.S. Federal Reserve-controlled U.S. market was obscenely overbought. Although he started with his predictions, Cook’s advice was correct (read his latest bear market alert in my MarketWatch column on December 4, 2021.

Cook looked for clues in the bear market. The first was the presence of failed rallies and the second was evidence that low buy-in strategies failed. This is exactly what has happened with the Nasdaq. He also warned that prices are the last to fall in a bear market, which is what is happening now.

Bearish markets are bad for almost everyone

Most investors have never experienced the destructive nature of a bear market. This includes many money managers who have enjoyed a 13-year bullish market, one of the longest in history. On the upside, making money is easy and fun, but on the downside it’s hard to keep your emotions under control and sleep well. Because many are learning the hard way, successfully selecting values ​​is a difficult task.

Some people believe that professional traders like Cook really enjoy bear markets. In fact, they are difficult for most people to manage, including marketers. First, in the middle of a vicious bear market, you get unexpected rallies that only last a day (last week, for example, the Dow rose 1,000 points and then fell even further the next day). ). These “wonders of the day” can decimate the accounts of short sellers who do not cover their positions on time.

Perhaps the only ones who are successful during a long bear market are traders who are excellent market timers. They use selling options, hedging strategies, and short selling strategies to make money, but it is extremely difficult. Most investors who can’t stand the pain of a downward trend in the market tend to switch to cash.

Buy and hold (but not forever)

The vast majority of investors follow the buying and holding advice of market veterans such as Peter Lynch, Warren Buffett and John Bogle. As long as you’re willing to hold out for the long term (more than five years, but usually much longer), and don’t panic when markets go down, in theory your portfolio should return to its previous highs. Until now, this has always been the case in the US market.

There are no guarantees, of course, because it depends a lot on the actions you take. However, if you are properly diversified, you can survive in a bear market. Unfortunately, some actions will not survive, one of the reasons why it is important to study both technical analysis and fundamental analysis. Do your homework with your actions and don’t rely on informants or sales to make business decisions.

Good news in a bad market

I want to end on a positive note. Bearish markets are usually short (from a few months to a year). When the downturn ends and most stocks stop falling, there will be incredible opportunities to buy stocks at great prices, especially for those who have cash.

If you are an indexer that uses average dollar cost strategies, you will have bought more shares at ever lower prices during the bear market. Your account will be well positioned to fully recover when the markets finally begin to recover.

When the US market was constantly rising, it seemed that most stocks would never go down. As the market continues to fall, it may seem that many stocks will never rise again. But bearish markets are running out. Someday.

Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks”. His latest book, How to Profit in the Stock Market (McGraw Hill, 2022), explores strategies for investing in the bullish and bearish market.

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Also read: 8 Ways to Protect Your Money If You Think Your Stocks Are Going Down Even More



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