At this point it is early to know whether a bear market has started, calling one early is generally unnecessary if you believe, as I do, that actual bear markets start slowly giving plenty of time to get out. As disclosed earlier this week we have started defensive action consistent with the SPX breaching its 200 DMA but if this is a bear market, I don't believe there is urgency to go 50% cash this week as some media outlet have or will imply.
One contributing indicator is something called the 2% rule which I have referred to many times and that I learned about in my short time working at Fisher Investments quite a few years ago. In a nutshell the 2% rule says that a bear market has started if the benchmark averages a 2% decline three months in a row. The market is heading in the direction being two months from its peak but two months is not three months.
I will be paying close attention and would expect to get more aggressive with defensive trades should the 2% rule come into play.
Yesterday we initiated defensive action in so called mid sized accounts where we use mostly sector ETFs. Most of these accounts own the Industrial Sector SPDR (XLI) at what had been about a market neutral weight. With yesterday's partial sale we cut the exposure to the sector in half.
One aspect of this site is to allow anyone who is interested to look at the thought process as it unfolds which is the ground covered above.
5 comments:
Hi Roger: Hope this finds u well. We have discussed the "Fisher rules" in years past, and as you know he said a 1.5 to 3% drop for 3 consecutive months precedes a bear market (which I realize you simplified to 2%.) However, if memory serves me well he also said anything over 3% in any of those months is a correction...obviously it is CRUCIAL to distinguish b/t a correction (new highs often reached in a couple of months) versus a bear market...so I am wondering if you are in the Fisher camp on the >3% part or if u think it just requires a drop of >2% (and it doesn't matter how much greater than 2%) for 3 consecutive months to call/confirm a bear market (note: so far in Nov the S&P is down 3.8% as per my calculations...) Thanks! Andrew L.
There is a psychological element to the 2% rule. The slow and gradual nature of it is such that is does not cause people to worry--the declines are small.
The current environment seems to show a little more worry than in late 2007 which I think the 2% rule would say offers hope for no immediate bear market. We will see.
I'm perplexed at the dive in investment grade preferred stock and higher yield securities.
You would think they would hold up a bit better than other moving parts of a portfolio given the currect circumstances.
Or, is the smart money bailing out before the tax shellacking comes?
T
T I hear this line of thinking a lot but why would someone take a cap gain at all for a name that they would not otherwise sell?
I dunno.
The market is in an interesting gyration...and apparently beholden to invester knee jerk reactions.
T
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