Investing for Idiots: Bear Markets are Good!


Everybody loves a bull market. A bull market is defined as a period of time during which major market indexes, like the Dow Jones Industrials, the S&P 500, and the NASDAQ Composite, along with the general mass of stocks, trend upward. Quite simply, that means that during a bull market stock prices generally go higher, and with them so go the values of 401(k), IRA, and other investment portfolios. Bull markets makes for great press and provide consumers with confidence thanks to the psychological “wealth effect” of higher stock prices. No doubt about it, bull markets are good!

And if bull markets are good, then what about bear markets? Most investors tend to think of bear markets as something to dread, or, better yet, something to just not think about at all. While a bull market always gets everyone’s attention, bear markets usually cause the “crowd,” the vast majority of investors, to lose interest in the stock market. When the market turns south, this is exactly the juncture at which most investors disengage. The irony, however, is that bear markets are not only good, but in some ways are even better for shrewd and prepared investors than bull markets.

Most investors “get back in” the market after a bear market period ends and they cannot help but notice that a new bull market is well along on its path higher. Generally they react to the continued rise of the market, usually skeptical at the outset but as the bull charges higher they are eventually forced to throw in the towel and come out of hibernation.. Some “get back in” later than others, but in every bull market the majority of investors “get back in” later than sooner. Statistics compiled by Investor’s Intelligence with its sentiment survey of investment advisers and by the American Association of Individual Investors with its own survey of individual investors show that most investors, professional or otherwise, are bullish at the top, while most are bearish at the bottom.

In a bear market the crowd is negative and uninterested in stocks, but market history shows that in fact the seeds of opportunity are sown within each new bear market. Shrewd investors understand that the same cycle of creation and destruction that fuels the driving entrepreneurial force behind the U.S. economy is necessary and observable in the stock market as well. While bull markets can be considered part of the creation side of the equation, bear markets provide the destruction. In this manner bear markets help to “clear the decks” and wash away the excesses of the prior bull cycle and economic “high-times.” Bear markets also help to identify the next bull market’s emerging leaders. Often times these will be companies with new, innovative products or services that are at the cutting edge of growth in any economic environment, and when a new bull market starts, those innovative, entrepreneurial companies that are publicly traded will tend to lead the market advance. Companies like Apple, Amazon.com, Chipotle Mexican Grill, Crocs, First Solar, Google, Intuitive Surgical, Lululemon Athletica, Netflix, Priceline.com, and Qualcomm, for example, just to name just a few.

The point we’re trying to make is that market history proves that some of the hottest stock plays begin their price advances right after a bear market ends, and it is during the bear market that some of their distinguishing characteristics set them apart from the rest of the stock market. For example, Qualcomm, Inc. (QCOM) was a big beneficiary of the move to smart-phones in the late 1990’s and early 2000’s with its CDMA technology. In 1999 QCOM had a huge price move, and as the two charts, one of QCOM and one of the NASDAQ Composite Index, during that time show, it set up during a sharp bear market in late 1998 and emerged from a big sideways price “channel” or “base” as we like to call it not too long after that particular bear market ended.

 

QCOM, like all big stock market leaders in every bull market throughout stock market history, was just starting to percolate going into late 1998 as it moved sideways in price for a long period of time as its earnings and sales began to pick up momentum and its products began to figure prominently in consumer technology trends at that time.

 

 

Charts courtesy of eSignal, Inc. ©2011, used by permission.

Thus investors should heed the lessons of Qualcomm and other winning stocks over the years by remaining vigilant during bear markets when “the crowd” has lost interest in the market and is looking the other way. What works in the stock market is not obvious to “the crowd,” and the only way that investors can avoid simply being part of the crowd is to stay ahead of it. Monitoring trends in new technology and industrial innovation, as well as trends in consumer tastes and needs, will help investors understand which new companies, and some of the older but still innovative and entrepreneurial companies like Apple, Inc., for example, are capitalizing on these new trends. At SelfishInvesting.com, we constantly monitor and scour for new emerging trends, whether the market is bullish or bearish, then email out reports in real-time as we see new stock buying opportunities present themselves.

Keeping abreast of new Initial Public Offerings of young entrepreneurial companies is another way for investors to be attuned to potential areas of strong growth in the next bull market. In late 1990, a young start-up by the name of Cisco Systems (CSCO) had its Initial Public Offering and by early 1991 the stock was off and running on a huge upside price advance as it capitalized on the rapidly emerging growth of computer networks. Investors should also monitor the price trends of these new entrepreneurial companies during bear markets, because like the Qualcomm example above, they could also be moving sideways as they “percolate” and set-up for big potential price moves once the bear turns back into a bull.

During a bear market, be smart by not doing the easy thing, which is to simply ignore the market when its lacks bull market excitement. Instead, do your homework during bear markets building a watch list of those stocks that may be showing signs of emerging as potential hot leaders in the next bull market in stocks.

 

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