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Investing – Preparing for the Next Bear Market
Reading the Investing Tea Leaves
What are the ‘Tea Leaves’ telling us, “The sky is falling?” No, wait, shake the cup again… “The sky is the limit?” Now that’s the answer we want!
If investing and trading were that simple, we could visit a Reader for a few bucks and know exactly what the future holds. Unfortunately, if you ask three Readers what their leaves are saying, you get three totally different professional opinions. Consistency is not their strong suit.
First of all, I have never before made any public prophecies regarding the future direction of the economy or the market and do not intend to start now. Furthermore, I’m not a stock market Bear, I’m not a Bull, I don’t have any silly buttons to slap that make all sorts of goofy noises to tell you to buy – buy – buy, and my dart board really is a dart board and not a stock selection device. I don’t think Chicken Little has ever been a good prognosticator and I don’t think the world will end tomorrow. But 25 years of market watching experience tells me there are some things that individual investors should certainly be concerned about.
Let’s filter out the generalized and sensationalized noise about every current market tick, up or down. We’ll leave that to the Talking Heads with their TV cameras and cup of tea leaves; it gives them something to do and keeps them from annoying 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 gain some insight as to what may be about to happen and how you can prepare.
Let’s look at some of the major factors.
For instance: 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 the housing market will not improve until foreclosures are no longer an issue and foreclosures will continue to be an issue as long as unemployment is not improving. With 25% of homeowners currently upside down on their mortgage (owe more than the property is worth) the light at the end of the tunnel for foreclosures continues to be attached to a large moving object with a very loud whistle.
As you may know, the mortgage crisis did not just go away. Meaning, all of those junk mortgages that were packaged and farmed out to the unsuspecting, were not paid in full by the happy homeowners, the money is still owed; there was just a little adjustment in the method of accounting so they look better on paper now. Let’s move on to another indicator.
With housing, mortgages, and foreclosures as a backdrop, now think about the price of Gold. As you know gold has been on a tear and continues to hover around $1400 per ounce. You have to ask yourself, what would cause this? Realizing that supply and demand ultimately sets the going price, the obvious increased demand for this precious metal is probably not because your dentist has been extremely busy filling cavities or your Jeweler has been planning for increased holiday traffic. So that really leaves only one logical conclusion. Concern over the currency, the Green back specifically, and more particularly, its value. Forget about the few novice traders that jump in buying gold at the current prices hoping the price will double overnight and they’ll get rich quick, if they don’t lose their money there, then they’ll lose it somewhere else. It’s their destiny. What we are concerned about is the big picture. And the big picture tells us this is not a good indicator for the economy to say the least.
There is an old saying, “If you want the truth, then follow the money.”
Aside from the currency concerns, worried gold-snatching investors, or Mr. Bernanke and his proverbial helicopter distributing green backs to everyone but you and I, what are the insiders doing?
You know, the ones that should be ‘In the know’ and have a handle on what the economy is likely to do and what effect that will have on the market, not to mention the affect it will have on their company stock price. I might add that I do find it interesting that giant companies like Microsoft, Hewlett Packard and others have recently made the news by searching for and hiring top economists away from places like Harvard. Why would they develop such sudden interest in economic professors?
Besides that, let’s see what the actual insiders are doing with their stock.
Insiders, of course, are a company’s officers, directors and largest shareholders. The ones who get a first-hand look at the orders, sales, projections, etc. They are also required by law to almost immediately report to the SEC whenever they have bought or sold shares of their companies’ stock.
Well guess what? They have been on a selling frenzy. Selling the shares of their companies’ stock at a record-pace not seen since early 2007. Let me remind you, that this was just a few short months before the Great Recession began.
Vickers Weekly Insider Report analyzes the insider data each week and calculates a ratio of the number of shares that these informed executives have sold that week to the number that they have bought. Vickers Weekly says, 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 pace of selling for the insiders, and should also be an eye-opener for the investor.
Now keep in mind these insiders were selling at record pace in early 2007 and hold your breath before reading what this sell-to-buy ratio was as of week two in December, 2010. 7.07-to-1. In other words, corporate insiders on balance are selling more than seven shares for every one that they are buying. Just to show this is not an anomaly, only two months ago the sell-to-buy ratio was 5.29-to-1, and obviously has increased since then.
Another factor the individual investor should keep in mind when thinking ‘big picture’ is Bear Markets. I know, no one wants to think about the market tanking and sucking the average of 29% of the value out of your investment account then having to wait a couple of years to get back to even. But like it or not, for the past 100 years there has been a Bear Market on the average of every three and a half (3.5) years. They come around just like clockwork, they last an average of 18 months, and then leave investors waiting another couple of years for the investment account balance to return to the black. Need I remind you, the last Bear Market started in 2007? You do the math.
So what should you do? I’m not suggesting you call your broker and sell out, and I certainly don’t want to sound like Chicken Little, it’s not my style. But I do believe you should pay close attention to the market indexes, tighten up the stops, prepare for the worst, and hope for the best. When I authored 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 decimation caused by market declines. Another very important thing to remember is your Financial Advisor will never tell you to sell. Protecting your investment dollars is solely your responsibility. So, either educate yourself on investing and be knowledgeable in making your own investing decisions or keep your hard-earned money safe in the bank. It’s your choice.
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