The plan: Part 1

This blog is part 1 of a 2-part breakdown of the bear market strategy that we are currently following. Part 2 will be posted by this Thursday. Over these two blogs, I hope to relay ways that you can minimize your downside, and recover any losses you’ve experienced in the most efficient way possible.

To start, allow me to recall a bit of personal history in the investment industry. This history relates to dealing with the current bear market. So bear with me here – pun intended.

I began in the industry in 1990. From that beginning point until 1999, I was fortunate to have participated in the second half of the greatest bull market run the world has ever know. From 1982 to 1999 the DJIA ran up more than 11-fold – from less than 1000 to a peak of 11,000. For my part, I was there for the run of 3000 in 1990 to 11,000 by 1999 – almost a 4-bagger!

During those years, I was taught the “Buy and hold/ you can’t time the market” mantra. When markets go up steadily, and you look at the long termed index charts showing huge gains over long time frames, its easy to buy into that strategy. I did.

My very own first stock market crash!

Then along came the technology bubble. The Dow fell from 11,000 to 8000 between 1999 and 2003. This 30% drop pales compared to the 50% drop during the 2008/2009 crash. But still, I was completely unprepared for a bear market, and I took the entire move on the chin.  My clients were unhappy. I was unhappy. It was around that time that I began studying technical analysis, but truthfully, I was not a very experienced or disciplined analyst.

Despite the shock of those losses, the 2001/2002 crash turned out to be one of the most positive things that ever happened to me. I vowed that I would never take such a major loss in the markets for myself or my clients again. I vowed to take what I learned from the experience and be better prepared for such events in the future.

In the following years, I formulated what is today the ValueTrend Equity Platform. The objective of that strategy was to reduce volatility. This, ahead of maximizing returns. The lesson I learned from the 2001/2002 crash was that most retail investors, even the ones that claim to be long termed investors, find a 2 year bear market is almost unbearable. Moreover, even when the bear market is over, it takes longer to recover losses than most people realize. Case in point, the 1999 highs were not seen again until 2006.

Most retail investors who think they are long termed buy and hold investors sure do change their story when a 7 year time period elapses and they’ve had 0 growth in their retirement funds. Worse, most retail investors throw in the towel and sell at an inopportune level during a prolonged bear market. Yet, they don’t re-enter anywhere near the bottom. They can handle 2-3 months of negative returns like we have had lately. Try it for 2 years and see what happens to investors psychology. Seeing how investors actually reacted to bear markets (most do not follow their own “long term buy/hold” mantra when the going gets really tough) convinced me that I needed to formulate a new way to avoid much of that pain for my clients.

 

Déjà vu

 

By 2007, the Dow was up to 14,000. The bull was back!

Then along came the Sub-prime mortgage crises, with an oil crash just to make things interesting. Most of the drop took place from early 2008 to early 2009.  The Dow was cut in half from 14,000 to 7000. This bear  was shorter than the 2001/02 crash. It only lasted about a year and a half  – but the damage was more extreme. A 50% haircut will test the convictions of even the hardiest long term/ buy & hold investors. The 14,000 peak was not seen again until August 2013. That is, a buy & hold investor would have taken 6 years to recover their capital (not including dividends) from their 2007 highs.

Thanks to my experiences in 2001/2002, I was more prepared for this selloff. Here are the numbers from our VT equity platform. They are taken from our records when we were at WorldSource Securities (gross of fees). It should be noted that they aren’t audited results, and as such are believed to be reliable but are not guaranteed as such by WorldSource Securities or ourselves. We only have numbers from June 27th 2008, but it gives a decent representation nonetheless.

June 27 2008 to December 31 2008: -25.95%

June 27, 2008 – December 31, 2009: -3.99%

As you will notice, our equity platform was net down about 4% by the end of 2009 from the June 27th 2008 level–closer to 6.5% after fees. The platform was break-even by the spring of 2010 (not shown above). The DJIA was break even 3 years later in early 2013. While we certainly did not catch the initial selloff, we managed to contain much of the damage going forward, and recovered much faster.

How did we do this? Once we established that the market had transitioned from bull to bear, we had a plan. Maneuvers between equities and cash afforded us a quicker recovery than the stock market. I had learned from the 2001 stock market crash. As the Who Sang…”We wont be fooled again!”

 

Déjà vu all over again!

 

Its likely that we are in for another multi-month bear market. We don’t know the future, just like we didn’t in 2008. Heck, if we knew the future, we would have sold everything in 2007! In fact, nobody knows when a bear market will begin. That’s why its difficult to catch that first leg down. We didn’t in 2008, and we didn’t this time either. People who claim they predicted any of the 2001, the 2008 or the 2020 crash’s have likely had random luck, are telling a lie, are exaggerating, or all of the above.

Instead of possessing a crystal ball, we possess a trading plan to deal with events as they occur. As famed Portfolio Manager Howard Marks says:

“You cant predict. You can prepare”

We’ll get into that plan in the next blog. But for now, let us establish that a bear market doesn’t necessarily get measured as legitimate just because it markets are down “20%”, or whatever. To me, a bear market is where there are a series of lower lows and lower highs on the weekly chart that push the market to remain below its 200 day Simple Moving Average for more than 3 weeks. I don’t identify a bull market until we see a higher peak, and a higher trough  – and a move over the 200 day SMA that lasts for 3 + weeks. Right now, we have a rally. This is encouraging. But…we don’t have a higher trough and a equally if not more important…a move over the 200 day moving average. So, its a bear market by my way of looking things. Until proven otherwise. Lets talk about how to survive and perhaps even thrive in this bear market. However long it lasts.

We’ll do that this Thursday – catch you then!

 

23 Comments

  • This must be the toughest time to manage money. It looks easy when the trend is up and pull backs are small. But here no on really has any idea the direction the market will take. With all the stimulus could go up from here or down.

    Reply
  • Where is the money coming from to drive a rally? Central bank of Japan? Dave Larew of thinktankcharts has a nice chart pack set up at stockcharts some of which correlate this. It is an interesting time to watch emotion drive the market not fundamentals. I would point out XLV healthcare ETF. Since the suspension of constitutional law and de facto martial law, citizen journalists have documented empty emergency rooms and hospitals. There are some serious losses of revenue and jobs here yet the sector is outperforming.

    Reply
    • Bert–you are correct in that this rally is entirely based on hopes that the monetary stimulation is going to turn the ship around quickly.

      Reply
  • Thanks Keith,
    Very Helpful Information.
    During these challenging times.

    Reply
  • The rally seems to be very limited to few FAANG names plus TSLA. Equal weight SP500(RSP) is 12% below 200 SMA while SPY is 4% below. How would you interpret this?

    Reply
    • Funny you mention this, Nilanjan–I was just looking at the same thing this morning. Its a sign that breadth is weak. Bearish, although weak breadth typically gives a longer heads-up. Things can stay this way for a while.

      Reply
  • I have half a plan so I’ll be interested to read part 2 of The Plan. I went through 2001 as well. But I was younger and had gotten out half of my positions by fear and chance–no experience. In 2008, I got swept down the river with everyone and did not reinvest early on but waited until 2013–exactly at that time you pointed out as break even.
    Today, I’m 30% invested in stocks, 30% bonds (and McConnel’s declare bankruptcy statement does make me nervous) and the rest in cash/equivalents. I added to my stocks several times since the market turned down. Then stopped. Now I watch. I suppose that is a part of my half plan–because who knows what is coming next–I don’t.
    Half plan: sell a few positions to lock in capital gains (UPS bought at 88 and change on the way down because this is one of those stocks that you talk about as being in a trading range), reinvest dividends in the solid businesses that I own, hold the big downers because now they are priced as if the world is coming to an end, buy if/when there is a grand finale blow-out down.
    Like I said-it’s a half plan. I remember 2008 and while some seem to be saying this is worse, it doesn’t feel that way to me. Doesn’t feel good–but a lot of people lost a lot, jobs, homes, equity… That was awful.
    Thanks for sharing your views on markets, trading, chart reading etc.

    Reply
    • Great comment Mary–I like your final paragraph. Its always different, but the feeling its not worse may be because of the income support governments are spreading around.
      I do worry about how working stiffs like us will be forced to pay it back. I also worry that the “minimum income supplement” that used to be bandied around by socialists may become a future norm–creating leagues of lazy, video-game playing unemployed people living in parents basements, while the rest of us go to work and get taxed at levels that are even more obscene than we are currently paying. Capital gains, income, housing, luxury taxes–its all for the taking. Not to mention the inflationary effects of money printing–what does this do to our savings?
      But I digress…

      Reply
  • Thanks Keith,
    I’ve been a long time follower.
    I really appreciate your analysis and context/history of events that have shaped your leadership during these volatile times.
    What’s your thoughts on Nat Gas on the yearly chart, it has an interesting MACD divergences and with less oil drilling for the next year at least is it an opportunity to go long Nat Gas ? or is it likely to be affected by the overall bear market.
    kind regards
    Pete

    Reply
    • Hi Pete–not sure if it will be affected by a longer termed bear, given you still gotta heat the house…but if businesses remain closed, I guess it would.
      Technically–the chart shows a very good potential for a quick move up. MACD is crossing up on the weekly, and the other momentum studies are rising from oversold. Longer termed support was successfully tested recently. Interesting…

      Reply
  • Look at the weekly chart for SPY, I see at least 3 higher highs unless i’m missing something? 2544 on March 22, 2789 on April 5, 2874 on April 12 and today we have also closed above that at 2878. I do see that we are still below 200 SMA but given the higher highs higher lows trend, isn’t it just a matter of time before we go above it? Trend seems to be pointing that way?

    thanks,

    Reply
    • Great point Ben
      I think you are looking at the daily chart to see those movements, but nonetheless, you have a point. The neckline of 2850 is being penetrated today. That implies a test of the 200 day SMA which lies near 3000 on the SPX.
      To your point, this could be bullish. I am waiting for a weekly chart pullback to feel more comfortable. Meanwhile, I remain 65% in equities, 35% cash.

      Reply
  • Hi Keith. Love your Blog. Just finished a 90 minute Blog video from Peter Schiff. His contention is that it does not matter what is happening today, we are doomed because the US is moving from a debt of $4 T to a debt of $10 T in a year or two. If the US $$ stays as the reserve currency all is good, but with that much US $$ in circulation, the US $$ will not stay as the reserve currency and the currency will collapse or at least drop a ton. Not looking for a comment as I know you analyze technical investing and everyone has an opinion……………..(Big time Cyclist like yourself)!!

    Reply
    • Steve–did Schiff comment on the worldwide accumulation of government debt? I am no economist as you say, so this is purely a question for someone other than I–but I wonder if worldwide money printing equalizes us all…just a question, not a statement…
      On the other hand, I do believe that consumer debt is a bigger issue. And the USA has (something like) 0.70 in debt/income ratio, vs close to double that in Canada–we are the most over leveraged consumer in the world – we are where the USA was in 2007. To me, that spells more trouble than government debt. Government debt can be inflationary, though, so perhaps that makes the consumer debt effectively shrink…unless the “equalization” effect I asked about means that it doesn’t.
      Ouch. This is hurting my brain!

      Reply
      • LOL………….He did talk about world wide debt. His headline is the US (and Canada) are printing far more $$ than most other parts of the world, especially Asia. The US, from his point of view, is printing so much, that their currency will fail to be the reserve currency in the future. It all depends on if it fails. Anyway interesting,

        Reply
  • I find it interesting that oil has dropped precipitously yet oil stocks have actually held up. I realize oil stocks dropped when oil initially crashed, since then oil has come down even more. Oil stocks on the other hand have come off their low, some substantially.

    Reply
    • Yes, thats been the case, but they can be disconnected at times. We sold our oil a month ago, but we sold the oil equities as they moved up in recent weeks.

      Reply
  • Spx looks like a cup and handle formation. Pointing back to old highs on daily chart

    Reply
    • That could happen. But it will not be based on forward looking earnings looking out for the traditional 6-12 months. I guess the SPX price could reflect 2 years out…? Unusual, but, then again, what is usual these days?

      Reply
      • Market may have already discounted bad earnings. The shutdown is so visible everyone already knows and expects a period of bad earnings. But forward looking things will only improve pending aa second “wave” of covid. Many places are still waiting for the first covid wave

        Reply
        • If the market has discounted the bad earnings, yet is rising to trade not to far off its Feb highs–this can imply a 2-year lookout (will earnings be back to normal in a year?). Or, crowd behavior (FOMO). Or, “don’t fight the Fed”.
          Who knows.

          Reply
  • If you buy oil stocks here and hold for at least a year how can you lose money?

    Reply

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