Why is our market so down?

[Captain Haddock]

So what happens typically in a bear market? Do people pull out and put their money under their matress, or ride it out, or still bravely invest in certain companies...? What's the general feeling/strategy? Sounds like I should keep my $ in the bank earning 8.5%...perhaps I should wait until the markets hit rock bottom (whenever that might be! : )

(Thanks for humouring a noob like me)

 

[Nick Radge]

I think there is a good chance we'll see the kind of market as we did in 1988 - 1993. Choppy and broad sideways trading for a number of years.

Those of you who think things can't get bad, just take a look back at the early 70's for a dose of what can happen. Try buying that dip; 4-years from top to bottom and some 66% decline.

I'll put a thought forward for 'discussion': Is it remotely possible, seeing as we're all so well versed in the impact of what China and India can demand, that indeed it - the Chindia phenomena -is already fully priced in?

 

[rustyheela]

In my opinion this is a decent correction and maybe a good time to look at buying sum of the banks. The fed speaks this friday, with a high possibility/ bias to interest rate cuts for the U.S. this MAY halt the slide, reduce the volatility, and maybe just find a bottom for our market.
according to 90% of my charts in downtrends isnt this a bearmarket already?
especially resources. buy when there is blood in the streets and all the talk is -!!

 

[Captain Haddock]

The fed speaks this friday, with a high possibility/ bias to interest rate cuts for the U.S. this MAY halt the slide, reduce the volatility, and maybe just find a bottom for our market.

A bottom....already?

 

[dhukka]

I'll put a thought forward for 'discussion': Is it remotely possible, seeing as we're all so well versed in the impact of what China and India can demand, that indeed it - the Chindia phenomena -is already fully priced in?

Nick,

If I remember correctly I think you put that thought forward in another thread months ago. I agreed with you then and even more so now. Difficult to know how much of the Chindia phenomenon is fully priced in given that it is a fast moving beast but the fact that so many parrot the same platitudes may indicate it is well known.

Conversely it can be useful to look at what is not priced in. A sharp slowdown in Chindia expansion is certainly not priced in. That to me seems to be where a good proportion of the downside risk lies for the Australian economy and stock market.

 

[krisbarry]

Those of you who think things can't get bad, just take a look back at the early 70's for a dose of what can happen. Try buying that dip; 4-years from top to bottom and some 66% decline.

Lots has happened since the early 70's though...including fully computerised trading systems and a so called "Plunge Protection Team". After Monday's open, which is expected to be down, I reckon we will have hit the bottom. from Tuesday onwards all eyes will be firmly focused on the US, and the upcoming Fed rate cut. A massive rally in late Jan/ early Feb, then the reporting season kicks off.

 

[Nick Radge]

dhukka,
Thanks. I hadn't realized I had posted that here before. I actually started discussing this theory back in February last year but the run into the June highs gave me some pause. As is commonly said, big trends take some time to turn.

rustyheela,
Australia is trying to cool its heels by raising rates and regardless of what the US is doing on its own accord, higher rates here will have a negative impact eventually. Usually when rates pass through 7.5% (which are now priced into 3-month futures) will we start to see fund managers think long and hard. If the growth of the market is forecast to be flat this year then 7.5% risk free becomes a good equation. This in turn produces the flat growth.

What we should be concerned about is how 'relaxed' the rate of decline currently is. It hasn't been a rapid shock like we saw in August. It has the same distinct flavour as the start of the 2002 bear market.

Stop the clock,
I am not insinuating that we're going to see a return of that 70's scenario, unless hyper-inflation kicks in. I'm simply suggesting that if people are hurting after what we've had so far then they have a lot of history to look forward to. Best they do the study now before it hurts their hip pocket.

 

[Real1ty]

A bottom....already?

No where near it yet.

There has been a lot of good avice to you so far.

Keep your money in a safe Bank in a safe account and learn to play the market and watch your play money diminish, not your real money.

 

[MS+Tradesim]

Lots has happened since the early 70's though...including fully computerised trading systems and a so called "Plunge Protection Team". After Monday's open, which is expected to be down, I reckon we will have hit the bottom. from Tuesday onwards all eyes will be firmly focused on the US, and the upcoming Fed rate cut. A massive rally in late Jan/ early Feb, then the reporting season kicks off.

Unbridled optimism = sheep to the slaughter.

http://globaleconomicanalysis.blogspot.com/2007/12/things-that-cant-happen.html

EDIT: There will very probably be short-term rallies, but there's no reason to think the bull will be back any time soon.

 

[Captain Haddock]

No where near it yet.

There has been a lot of good avice to you so far.

Keep your money in a safe Bank in a safe account and learn to play the market and watch your play money diminish, not your real money.

hmmm...ok, I'll bow to your greater wisdom

I thought I'd invest in shares this year, I've done a lot of reading in preparation, but if you guys are telling me to sit back and watch, then I will.

 

[jman2007]

Here's my

the market is always going to go through cycles, and periods of ups and downs. Some people don't seem to realise that for the market to function properly, there HAS to be periods of downtrends in stock prices.

If everyone held their postions, it would simply lead to fewer sellers and a grossly over-valued index. My advice would be to stop worrying about the short-term trends, and take a long-term view. Look at the buying opportunities that appeared after the Sept sell-off, for those that were brave enough to go against the dooms-day mood that was prevailing.

If I was a jittery investor, I would be turning towards gold, gas and oil stocks, and perhaps reducing my postion in companies with direct exposure to the US, particularly in the credit sector.

As always, DYOR.
jman

 

[Gundini]

hmmm...ok, I'll bow to your greater wisdom

I thought I'd invest in shares this year, I've done a lot of reading in preparation, but if you guys are telling me to sit back and watch, then I will.

Captain, there will be opportunities that may present themselves shortly, but for now it is best to wait til the dust settles.

Important factors are:

Are we heading into a bear market? This is important because they can last for years. If we are not, then usually after a downturn like this it can take 6 months for the stocks to pass their previous highs. It's too early to call a bear market, but there is enough information to suggest it is possible/probable. Your risk is in trying to pick the bottom. I am sure you are aware of basic phrases like, "Don't try to catch a falling knife", or "Bottom pickers get dirty fingers"...

Consider that the US is on line to drastically reduce interest rates. A gambling man may suggest there may be a bit of a rally to fuel the market. But rest assure, the underlying problems exist, and no bandaid sollution will acheive their required balance of growth with low inflation.

Also remember the US dollar has been plumeting for a long time. It has alot further to go, but there will be a point where they will be able to export cheaply, and compete Globally and fiercely. The US is a very resilient economy. If they can't kick start the old stars and stripes, they will start a war! It's worked for them in the past, and it will work for them again.

The big picture here will ultimately tell the story. Check out the all time data on the S&P 500. A pretty picture it is not! It is warning us that these times are rare, and bravado should remain with the patient.

At the end of the day, it becomes an individual choice, so I can't tell you what to do, because I don't know, but if you would like to make an informed decission, you could do alot worse than DYOR...

 

[weird]

This is important because they can last for years.

http://www.fool.com/dripport/2002/dripport020725.htm

What is a bear market?
We thought you'd never ask. A bear market is defined as a 20% or greater decline in value for a major stock market index (namely the Dow Jones Industrial Average, S&P 500, or Nasdaq Composite). Once stock indexes fall 20% or more from prior prices, we're said to be in a bear market.

How often do bear markets happen?
Since 1956, a bear market has occurred, on average, once every five years. In the last 50 years, we've seen about 10 bear markets. Prior to this one, 1990 was our last true bear market. So, when this bear market started in 2000, we were statistically overdue.

When will the bear market end?
Since 1942, the average bear market lasted about 10 months, peak to trough, while about 35% of bear markets have lasted 1.5 to 1.8 years. After a bottom is hit, rebounding is usually a volatile, sporadic process. If we assume this bear market began in spring 2000, it's more than two years old, making it one of the longer bear markets in history. If history is any guide (there's always a chance history will mislead us), we can "expect" stocks to stop sliding in this dramatic fashion soon.

On a side note, major Bank stocks are already down about 20% from recent highs ... however the overall index has not fallen this far (yet ???) ... And not a bad call for that article, which was written in July 25, 2002.

 

[nizar]

And not a bad call for that article, which was written in July 25, 2002.

Yeh i was thinking the same thing.

 

[cordelia]

So what happens typically in a bear market? Do people pull out and put their money under their matress, or ride it out, or still bravely invest in certain companies...? What's the general feeling/strategy? Sounds like I should keep my $ in the bank earning 8.5%...perhaps I should wait until the markets hit rock bottom (whenever that might be! : )

(Thanks for humouring a noob like me)

You have to do what's right for you. Basically how much are you prepared to lose. How will you know when the markets hit rock bottom?

I am a novice and like everyone else I hate losing money. I started dabbling in the stock market as a hobby and unbelievably up until dec have never had a loss. I haven't made a fortune but its been a lot of fun and I have never risked money that I needed in the short term.

However, I bought into some bank stocks in December and PEM..fortunately I got rid of most of banks but the ones I still had took a tumble ..mqg Anyway I don't know enough about the stock market or charting to guess where its going so I have converted a lot to cash and parked it in my mortgage. At 8.4% I get security and no cgt. Its not huge but its safe.

I can draw down on it when I need to so its still liquid.. I still have some shares which are down but they are solid stocks.

I just asked myself if everything went pear shaped did I have enough cash to ride it out and the answer was no.....so I took a loss on the stocks that would give me less return than my mortgage. I don't want to be in the position of being forced to sell stocks at dirt cheap prices because I need the money. That's when the smart people buy.

It may go the other way and I could lose some profit but I just don't have the skills to play the game.

...build on your strengths.....embrace your weaknesses.

 

[weird]

Hi Nizar,

Just some further thoughts, after reading your reply (thanks), considering that in the above post, if we require a 20% fall in an index, to finally conclude we have a 'bear market', which then possibly could rapidly start again into a bull market, that is, we acknowledge we have a very 'lagging' indicator, I ponder over the effectiveness of attempts at 'market timing', especially for long term trading systems which are designed to take advantage of the historical market upward bias. The other extreme of a lagging indicator , could be to have a very "over-sensitive" or a predictive indicator.

And further, if only such lagging indicators are an absolute to our present position in a cycle, I also wonder of the effectiveness of other attempts to determine whether a market (that is, tradeable or group of tradeables) has also changed to a trending or ranging behavior, to then attempt a 'timing' switch for a change in strategy (which may include standing aside) which I also see attempted by other system designers.

One method I am aware of, that does not include general "market timing", uses system feedback only based on its own equity curve. And the trader may use a group of systems, and may stop trading one system for a while until the 'imaginary' equity curve points back up again, and will simultaneously continue to trade his/her other systems until similar feedback is provided. That is, instead of 'predicting', one waits to be told that the conditions may have changed.

Another alternative, particularly if one solely uses a long only stock system, which is designed to take advantage of the 'upward bias' of the market, and has filtered his signals to only trade stocks which have extreme bullish sentiment regardless of wherever we are in the overall market cycle, one may just grin and bear the pain for the duration of a bear market, but continue to take signals whenever they arrive (and hopefully beat the index, with his/her trading in the positive territory), even if it means falling into cash for some of this cycle due to lack of signals. As a technical system trader, I assume that an exit would have been decided on before entering the trade. Hopefully one has an expected historical drawdown, that one has accepted before trading, and if exceeded then one would decide whether to continue trading (either completely or that system).

The above, are just some of my thoughts at this current time, and in no way a recommendation or suggestion. DYOR.

 

[treefrog]

good post weird - was wondering when someone was going to post a definition of what was being discussed - hadn't "bought in" to this thread because of that.

I think the following from wikipedia also helps:

Prices fluctuate constantly on the open market; a bear market is not a simple decline, but a substantial drop in the prices of a range of issues over a defined period of time. By one common definition, a bear market is marked by a price decline of 20% or more in a key stock market index from a recent peak over a 12-month period. However, no consensual definition of a bear market exists to clearly differentiate a primary market trend from a secondary market trend.

Investors frequently confuse bear markets with corrections. Corrections are much shorter lived, whereas bear markets occur over a longer period with typically a greater magnitude of loss from top to bottom.

treefrog's long held view is that it all depends on your trading time base

if day by day, most sectors/indexes are in bear mode now

but week end by week end - the long term trader/investor, we don't yet have a bear

and according to definiton etc, you can't be sure until its over/nearly over

but I am definately not happy with that idea so I use the old basic, tried and true market rules to define trend
Uptrend: [but first decide if you are trading EOD (end of day prices) or EOW week) and put that on your chart] the price action makes higher highs and higher lows after a downtrend has been broken
Downtrend:the price action makes lower highs and lower lows after an uptrend has been broken

for me, a bear market is the establishment of a weekly downtrend

I suspect there will be a lot more agreement on this site when (if ) the EOW downtrend is confirmed
most indexes on the EOW chart are near to breaking the Uptrend and confirming a new downtrend

an important one that already has confirmed is the "engine room" of the US the russell2000 index