Saturday, October 11, 2008

Why I'm looking for a bounce and why it's just that

Markets do not travel in straight lines. There is a daily clash between buyers and sellers. Some believe things are going to get better and some believe they will get worse. It is impractical to always be a bull or bear. Investing is about making money, not blindly always cheering for the same directional outcome. Being a bull in the stock market from 1982 through 2000 was a great idea. Since then, not so good.

During the wicked stock market bear market from 1929 thru 1932, the Dow Jones lost 89% of its value. That's right, 89%. If you lose 89% of your investment, you will then need to make over a 900% gain just to get back to even. Translation: don't "suffer" through bear markets because Suze Orman or Ben Stein told you to invest "for the long haul."

This chart below is courtesy (no permission obtained) of, via the website.

Though the big picture is clear - this is the chart of a bear market over 3 years that wiped out 89% of investors' capital - the short term swings are wild and each contains a year's worth of gains! Bear markets are great for traders because of the wild swings in both directions. Stated another way, bear markets are more volatile than bull markets. In fact, some of the greatest positive gains in daily and weekly percentages are during bear markets, not bull markets. When you see multiple days in a short period of time that show 3-5% gains for the general stock market averages, you are paradoxically much more likely to be in a bear market than a bull.

For those not interested in the day to day drama, moving to cash at the top of the 1929 market meant that you could have bought NINE TIMES the number of stocks just 3 years later by staying out of the market. Additionally, the number of companies that had gone out of business by the end of this wicked bear market meant that the companies left standing were lean, mean, money making machines with a high dividend yield. This leads to wealth creation and this is why staying in cash during a bear market is a great passive strategy. But you have to pay attention to see the bear markets coming. In other words, did Cramer and/or the jag-offs on CNBC warn you a year ago that a bear market was coming and you should sell all your stocks?

Me, I'll stick with attempting to trade the intermediate bear market swings to magnify gains. That's why I'm getting ready to buy gold miners hand over fist, since I anticipate a wicked rally in this sector that will outpace the upcoming general stock market rally. A week ago? I was shorting the market. Now, I'm a bull. I will continue to labor to be neither an uber-bear nor a bulltard, but rather a shrewd investor.

Wikinvest Wire