There is a lot of talk amongst investors regarding a bear market on the horizon. Should this be a cause for alarm? Only if you lack the education of how to be a long term investor, a "bull" in a bear market.
If you note the following chart of the S&P 500 this year, you will notice that starting July 15th, we entered the usual seasonal downturn that the markets usually have to deal with every year. This is not currently a bear market. We have experienced several corrections. A correction is much shorter lived than a bear market.
(Click to enlarge)
This year was extremely signficant, as the downturn revolves around the credit crisis that is facing the economy. We have also enjoyed a good bull run since 2002, so investors are becoming concerned that the run is over, and it's time for a bit of a bear market. Which is a fair concern. Nothing goes up forever, and it is the nature of the markets to move down, as well as up. Well, how do we remain a bull, in a bear market? Because if you invest for the long term, that's what you are doing.
Well, obviously we don't want to get caught buying near the top. Therefore, we note that the current support for the market, initially, is near the 1400 area. If you feel you must buy into the market, you would want to wait to see the market bounce off of that support before you do so. The closer the market gets towards 1500, the less you want to buy. But that does not mean you have to buy for a long term investment account at all, even near the 1400 area. At this point, I really wouldn't do so. I'd just wait to see how the whole subprime mess affects the market for 2008. Just save your money, and wait. Why?
Generally, if the 1400 area is violated, the support will then come in at the 1370 area. If this support is violated, we would have officially entered a bear market. Lower lows (LL's) will have been made, and we are not making Higher Highs (HH's). Already you can note that our market highs are not reaching previous levels. If 1370 is violated on the S&P 500 Index, at that point, I believe it would be best to wait for at least year before reinvesting in the market in the long term. That doesn't mean there isn't money to be made trading in the meantime. It just means that for a portfolio, which is concerned with buying at lower prices for the long term, we would want to wait. The market can drop up to 40%, and at least drops 30% during a bear market. During that 30% drop, you will typically see 3 more rallies before the bear market finally exhausts itself. Each bull rally within a bear market generally lasts longer than the one before it. If we do violate the 1370 area, then the first rally could be considered the last 10 day rally before the 1370 support was violated. 3 more rallies typically follow that one. And the fall will be between 30% to 40%
What can you do now to help yourself, in case we do see this eventuality?
- Instead of using it to purchase shares, you could use the cash to pay off any margin balance that you may be carrying.
- Do not sell your long term (20 year plus) holdings. Simply hold onto them. You can Dollar Cost Average and average out your position once the bear market is completed. This is the golden opportunity that a bear market presents for the long term investor. You may decide however, to shed your long term holdings that you have been looking to hold for less than 9 years.
- Save your money that you would normally add as investment purchases, to see how things play out. At this point, I myself will no longer be buying for my long term investment portfolio, although I will be adding cash deposits to those accounts. Biding my time, exercising patience, and watching.
What does this mean for the Low Funded Challenge Accounts? Well, actually, it's a good thing. We have not purchased any long term investments for the Sharebuilder account, which as of this date holds a balance of $130.64. So we will not have to worry about any drawdown in that account, and actually, will be earning the higher interest on our savings in that account. We had not planned to make our first investment until that account reached $650. Therefore, if 1370 is violated, this will mean we miss no opportunities, but be able to safely save that money. We are still saving our money for the optionsXpress account, which as of today, stands at a balance of $570.00. We had not planned to make our first trade until that account can safely assume a good trade and risk of $65.00, with such a risk being around 5% of our account size. And the nice thing about Futures options, is that it does not matter if we are in a recession, a bear market, or enjoying prosperous times. You can trade Futures options regardless.