Investing: Prepare for the Next Bear Market

Reading the investment tea leaves

What do the ‘Tea Leaves’ tell us, “The sky is falling”? No, she waits, shakes the cup again… “Is the sky the limit?” That’s the answer we want!

If investing and trading were that simple, we could visit a Reader for a few dollars and know exactly what the future holds. Unfortunately, if you ask three readers what their sheets say, you get three totally different professional opinions. Consistency is not his forte.

First of all, I have never before made public prophecies about the future direction of the economy or the market and I do not intend to start now. Also, I’m not a stock market bear, I’m not a bull, I don’t have silly buttons to push that make all sorts of silly noises to tell you to buy, buy, buy, and my dartboard really is a dartboard and not a stock selection device. I don’t think Chicken Little was ever a good forecaster and I don’t think the world will end tomorrow. But 25 years of market-watching experience tells me there are a few things individual investors should be concerned about.

Let’s filter out the generalized and sensational noise about each current tick of the market, up or down. We’ll leave that to the Talking Heads with their TV cameras and cup of tea; It gives them something to do and keeps them from bothering us. We want to focus on the big picture, the major events and how these events are likely to affect the economy and ultimately the future direction of the market. Hopefully, you can get an idea of ​​what may be about to happen and how you can prepare.

Let’s look at some of the main factors.

For example: Unemployment, Foreclosures, Housing Market, Mortgage Crisis, the Dollar, the EU and Gold, just to name a few.

It’s not rocket science, simple common sense says that the housing market will not improve until foreclosures stop being a problem and foreclosures will continue to be a problem until unemployment improves. With 25% of homeowners currently upside down on their mortgage (they owe more than the property is worth), the light at the end of the tunnel for foreclosures remains attached to a large moving object with a very loud hiss.

As you may know, the mortgage crisis did not go away. I mean, all those junk mortgages that were packaged up and given to the unsuspecting, weren’t paid in full by the happy homeowners, the money is still owed; There was only a small adjustment to the accounting method, so they now look better on paper. Let’s move on to another indicator.

With housing, mortgages and foreclosures as your backdrop, now think about the price of gold. As you know, gold has been on the up and continues to hover around $1400 per ounce. You have to ask yourself, what would cause this? Realizing that supply and demand ultimately set the current price, the obvious increase in demand for this precious metal is probably not because your dentist has been extremely busy filling cavities or your jeweler has been planning for more traffic. holidays. So that really leaves only one logical conclusion. Concern about the currency, the greenback specifically, and more particularly, its value. Forget the few novice traders who jump in to buy gold at current prices hoping the price will double overnight and they will get rich quick, if they don’t lose their money there they will lose it somewhere else. It is your destiny. What concerns us is the big picture. And the big picture tells us that this is not a good indicator for the economy, to say the least.

There is an old saying: “If you want the truth, follow the money.”

Currency concerns aside, investors worried about gold theft, or Mr. Bernanke and his proverbial helicopter distributing greenbacks to everyone but you and me, what are the pundits doing?

You know, the ones that should be ‘in the know’ and get an idea of ​​what the economy is likely to do and what effect it will have on the market, not to mention the effect it will have on your company’s stock price. I might add that I find it interesting that giant companies like Microsoft, Hewlett Packard and others have recently been in the news looking for and hiring top economists from places like Harvard. Why would they develop such a sudden interest in economics professors?

On top of that, let’s see what the real experts are doing with their stocks.

Insiders, of course, are the officers, directors, and major shareholders of a company. Those who know first-hand the orders, sales, projections, etc. They are also required by law to report almost immediately to the SEC whenever they have bought or sold stock in their companies.

Well guess what? They have been in a selling frenzy. Selling off their company shares at a record pace not seen since early 2007. Let me remind you that this was just a few months before the Great Recession began.

Vickers Weekly Insider Report looks at insider data each week and calculates a ratio between how many shares these insiders sold that week and how many they bought. Vickers Weekly says that, over the last four decades (40 years), this ratio has averaged between 2 and 2.5 to 1. Any reading above 2.5 to 1 is an above-average selling pace for experts, and it should also be an eye -opening for the investor.

Now keep in mind that these experts were selling at a record pace in early 2007 and hold your breath before reading what this buy-sell ratio was in the second week of December 2010. 7.07 to 1. In other words, corporate pundits are generally selling more than seven shares for every one they are buying. Just to show that this is not an anomaly, just two months ago the sell to buy ratio was 5.29 to 1 and it has obviously increased since then.

Another factor for the individual investor to consider when thinking about the “big picture” is bear markets. I know, nobody wants to think about the market crashing and absorbing an average of 29% of the value of their investment account and then having to wait a couple of years to get back up to par. But like it or not, for the last 100 years there has been a bear market on average every three and a half (3.5) years. They arrive like clockwork, last an average of 18 months, and then leave investors waiting a couple more years for the investment account balance to go back into the black. Need I remind you that the last bear market started in 2007? You do the math.

So what should I do? I’m not suggesting you call your broker and sell yourself, and I certainly don’t want to sound like Chicken Little, it’s not my style. But I do think you should pay close attention to the market indices, adjust the stops, prepare for the worst and hope for the best. When I wrote the books ‘Charting and Technical Analysis’ and ‘Common Sense Investing’, this current market scenario is exactly what I wanted to prepare the individual investor for. And more importantly, how to avoid the dredging of portfolio annihilation caused by market crashes. Another very important thing to remember is that your financial advisor will never tell you to sell. Protecting your investment money is solely your responsibility. So, educate yourself on investing and be well informed to make your own investment decisions or keep your hard-earned money safe in the bank. It’s your choice.