I am getting this question a lot as of late. If we are in a bear market, how would we know?
This is an important question because it would be an important change of season for investors.
If you lived in the Midwest where they have distinctive seasons, you are on guard from when it changes from fall to winter. The winters are brutal in the Midwest. During the winter you do things differently. You dress differently. You drive differently. Your activities are different. You change your strategy for life once the bitter cold moves in.
The same approach applies to your investments. If a bitter bear market is upon us, you change your approach with your investments. The bear doesn’t hibernate forever! That is your Plan B. When Plan A ceases to work (the market going up) then plan B is your game plan. (for more information on Plan B investing see below) Most investors will wear shorts in the winter. Said another way, most investors will stay Plan A invested in a plan B environment.
So back to the question – how do you know? Since there is nothing that can 100% predict the direction of the market (repeat that phrase in your again every time you hear a prediction) and since crystal balls don’t exist, you have to look for clues.
You focus on the price level of the stock market.
This is critical. What is a price level? Let’s look at the S&P 500. The S&P 500 as of this writing is at a price level of 2029. Today it started at a price level of 2045. Obviously, not a good day for the S&P 500 thus far. If the price level is going down, most stock based investments are going down. (Don’t understand? ASK BOB – link)
Bear Markets are defined by a -20% loss
The first thing we look at is the price level that represents a -20% loss for the S&P 500. The 1705 price level of the S&P 500 would be the bear market marker. If the market falls below that number and stays there, investors are more than likely in for a lot more of a painful loss. So, how the S&P 500 reacts to reaching 1705 will tell us a lot. In 2011, the S&P 500 declined -19% and then turned back around and resumed the bull market.
Other Important Price Levels
2064 – below this level right now as of this writing
1828 (this is a critical price level right before the -20% price point)
Then there are long-term indicators. (for more information on long-term indicators see below)
The long-term indicators I watch are at the moment negative and have been negative for a while now.
What should you do? Be observant. Know ahead of time what your plan B will be. Don’t be complacent – Bear Markets take advantage of complacent investors.
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