Financial Literacy

A New Bull Market… or a Bear Market Bounce?

  • Did we just enjoy the shortest bear market on record, or is it just getting started?
  • Today, Alexander Green discusses how wealth builders prepare and looks at what’s ahead.

A bear market is defined as a drop of 20% or more off the top. A bull market is defined as a gain of 20% or more off the bottom.

By those definitions, we have just endured the shortest bear market on record – just 11 days – and are now in a brand-new bull market.

Or are we?

Investors are happy that President Donald Trump declared a national emergency, Congress passed a multitrillion-dollar relief bill, and the Federal Reserve cut rates to zero and promised unlimited liquidity for credit markets.

But that doesn’t mean all the doubt and volatility are behind us.

The number of coronavirus cases is still rising. There are likely to be plenty more bumps ahead.

Down markets are a fact of life, of course. They appear out of nowhere and without warning.

And they can be brutal.

Since 1929, the S&P 500 has suffered 14 bear markets.

(The true number is 15 if you include the 19.8% drop that ended on Christmas Eve 2018.)

The shortest bear market, before this one, was in late 1990. It lasted three months.

The longest was from March 1937 to April 1942. And the deepest was the 86% collapse from September 1929 to June 1932.

The average bear market lasted 19 months and delivered a 39% loss from the peak. (This month’s fell just shy of that.)

Because no one can accurately and consistently predict bear markets, investors have to prepare for them in advance.

However, that doesn’t mean sitting in cash, earning a negative real return.

Or jumping in and out of stocks, and risking being in during corrections and out for the rallies.

Or hoarding gold, an investment that accrues no interest, generates no earnings, pays no dividends and provides no cash flow.

So how should you prepare for a down market? The way Oxford Club Members do.

We spread our risk outside of equities, with investments in high-grade bonds, high-yield bonds and inflation-adjusted Treasurys.

We hold gold mining shares that often appreciate in value – or at least fall less – when the broad market swoons.

And we diversify our equity holdings among large and small caps, growth and value stocks, and foreign and domestic companies.

In The Oxford Communiqué‘s Oxford Trading Portfolio, we run trailing stops behind our individual stocks.

By mid-March, we had stopped out of all but two positions. We locked in profits in some and curtailed losses in others.

(According to our official scorekeeper and Research Manager Ben Dressing, we’ve stopped out of 13 stocks in the portfolio so far this year with an average total return – based on initial entry prices – of 31.5%.)

We have three other Communiqué portfolios – the Gone Fishin’ Portfolio, the Oxford All-Star Portfolio and the Ten-Baggers of Tomorrow Portfolio – where we don’t use trailing stops.

(These portfolios allow us to take advantage of a V-shaped recovery, a rare possibility but a distinct one in this case.)

In the Gone Fishin’ Portfolio, we rebalance once a year to reduce risk and boost returns. In the other two, we sell only when there is a change in the fundamental outlook.

As this month’s bear market reached its nadir, we doubled down on three stocks in the Ten-Baggers portfolio, reducing our average cost.

And in our Oxford Trading Portfolio, we reinvested in two companies that will prosper during the pandemic and bought a high-yielding, out-of-favor energy play with massive insider buying (more than $91 million worth).

We will carefully and selectively add new positions in the days and weeks ahead.

A week ago, market pundits were guessing where the bottom would be.

Having failed at that, they’re now opining about whether we’ve seen the bottom.

The truth is no one knows.

However, I’m inclined to disagree with the talking heads on CNBC who keep insisting that the market will bottom only when coronavirus cases peak in a few weeks.

That is almost certainly wrong.

The market is a leading indicator. It plunged as investors anticipated the economic damage the virus would do.

It will climb as they anticipate the recovery to follow.

Looking at last week’s market action, we may well be in that phase now.

Or not. That’s why it’s wise to stick to the program outlined above.

This way you’re prepared for whatever the future sends our way.

Good investing,

Alex


About

An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.

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