Now is a time when it is hard to be a long-term stock investor<\/b>
\nA monitor displays stock market information on the floor of the New York Stock Exchange (NYSE) in New York, U. S., on Friday, Dec. 14,2018. Volatility continued to grip financial markets, with U. S. stocks erasing a weekly gain. Photographer: Michael Nagle\/Bloomberg \u00a9 2018 Bloomberg Finance LP
Eleven days ago, in \u201c Wake Up: Stocks Are In A Bear Market, So Sell Something,\u201d I described the five steps I thought were in store for the stock market. The first four are now done, and that puts the market (and us) fully into step #5:
Last week took care of step #4
Before the market opened last Monday (12\/10), emotions were still in check. (\u201c The WSJ, Not CNN, Captures Investor Mood: Non-Panicky Bear Market Headed Down \u201d)
The market then fell sharply that morning, followed by an abrupt rise. Although the media attempted to identify causes, they were unsuccessful. (\u201c Today’s Stock Market Volatility: Its Two Causes Are Not Fundamental, And That Changes Everything \u201d)
At that point, it seemed just a matter of time for a link to exhibit itself, proving to most investors that the stock market\u2019s bearish moves were rooted in real negatives (step #4).
That happened on Friday\u2019s gap-down, 500-point Dow drop. The cause was actual reports of slowing growth in both China and Europe. Importantly, the link was fully described in this weekend\u2019s leading articles, including widely disseminated pieces like the one from the Associated Press: \u201c Stocks plunge to 8-month lows on growth fears.\u201d
The link could not be clearer, so that takes care of step #4.
Step #5, entering the red zone, the stock market has no time limits and no performance constraints
Driven by fundamental unknowns\/negatives, an ugly technical picture and heightened, emotion-driven decision-making, the market is free to wander, run and gap up or down.
This bear market can last months and even more than a year. In addition, it can fall to levels that may seem inconceivable now: down 25%, 35%, 50% — any depth is possible. There are so many fundamental issues in play that there is a real possibility of a rolling recession, where reversals in one area spark setbacks in another.
Moreover, the market has an unusual technical picture, something that is studied when fundamentals become doubtful. That steady rise in 2017 left the market with few price barriers where the market paused and created a foundation. That means the nice, low volatility rise last year could become a slippery slope next year. That picture is evident in this graph of the Dow Jones Industrial Average (the most commonly discussed index in times of investor excitement and anxiety).
The DJIA bear market picture John Tobey (StockCharts.com)
The points shown in the graph are possible stopping or resting points. They range from previous price barriers (there aren\u2019t many), moving averages (the index now is below all of them), percentage drops (these are very weak), retracement amounts (one-half is commonly cited, but the range is more like 1\/3 to 2\/3) and even-numbered index levels (more commonly a headline item than a real stopping point).
With only those mostly useless points, the technical picture is primarily one of a huge air pocket.
What about fundamentals?
Virtually everything that has sold off looks cheap, but that is because stock prices fall in anticipation of fundamental declines. During that time, the low prices and stale fundamentals give an erroneous sense of value. Once that is seen and accepted (I don\u2019t think we are there yet), valuation analysis loses its value.
Dividend yields can help, but\u2026
The one item that can serve as a guide is dividend yield, so long as the company has the capacity to continue paying in a recession. However\u2026 As is being written about, investors can now get a higher yield from a safe money market fund than a risky stock. So, do not expect dividend yield to provide a support level until prices fall further, causing yields to rise.
The bottom line
We have entered the messy part of a bear market, where fundamentals lose their usefulness, the business news is mostly negative, emotions assail investors and traders have a field day.
What to do? The best answer is \u201cto each, his own\u201d \u2013 meaning that each investor should stick to the strategy that is best for that person.
As an example, I do not short stocks, trade stocks or venture into other types of investments. My focus is on stocks, so I prefer holding cash reserves when I do not own stocks. In that way, my mind remains clear and focused on finding a good buying opportunity. In addition, not riding the roller coaster helps keep my emotions under control.
There is a primary task for all investors: Prepare for that time when emotions fairly scream, \u201cSell!\u201d That gut feeling comes at exactly the wrong time to sell (and at exactly the right time to buy). Importantly, that scream does not come from exasperation or a feeling that, \u201cI cannot take it anymore!\u201d Instead its cause is the certain belief, supported by everything being written, that the worst is yet to come.
Note: I have been writing about this bear market since October 17. See the list here.
Disclosure: Author holds only cash reserves
During my 30-year career, I managed and consulted to multi-billion dollar funds. Using the \u201cmulti-manager\u201d approach, I worked with leading investment managers. I now manage personal accounts and write about my analysis and decisions….
From my 50-year personal\/professio…<\/p>\n