The widely accepted definition of a bear market is a 20% decline over a two-month period.
The question I ask is this: Why must you watch your portfolio drop 20% before you now take action?
Can you be bearish (or a bear) without losing that benchmark 20% first? In other words, hold a belief that the market will go down before it actually drops.
Seeing the signs of a down trend before you are sitting with a 20% decline in your accounts will undoubtedly improve your market performance and long-term results more than just about anything.
Bear Market Signals
So here are seven common signals that the bear is on the near horizon:
- The market begins to gap up in price in the morning at the open but ends up closing lower each day for multiple days.
- Previous stocks that were leaders are struggling to hold their 50 day moving averages, many are trading below their key 50-day moving average.
- There is a lot of uncertainty about the future in the overall economy.
- The market is making lower highs and lower lows over multiple weeks.
- Money is flowing out of mutual funds and into bonds in large amounts.
- Talking heads are trying to convince people to buy stocks, that they are now a great “value.”
- Consumer-staples-type stocks start outperforming (e.g. Wal-Mart Stores (NYSE : WMT), McDonald’s (NYSE: MCD) and dollar stores) along with utilities.
When all these things line up, there is usually a high probability that something is changing.
Over time, these combined signals have been a fairly reliable indicator to consider minimizing your risk before strong selling happens, as the market is signaling caution.
Remember that no matter how great a company is or how amazing its earnings, products or gizmos, nothing will be safe in a bear market.
As the old sports and investing adage goes, “Offense wins games but defense wins championships.”