Since this global bear market began last October, market participants remained largely in the state of disbelief. For those of us trying to point out the looming risks it was rather difficult to watch the damage mount as “fools fiddled”. Week after week and month after month mainstream financial “advisors' called the bottom and pled for people to stay put, look long-term, don't blink.
That always works for a while to keep people in. Then in about August of 2008, belief in the economic downturn began. Each day, more people were turning bearish on the economy. More people began to voice concerns that the credit crunch was not abating and risked lasting harm to the economy. The Volatility Index (VIX) that had been slumbering along at record complacency below 10 for much of 2006 started to pick up.
As world governments have pulled out one band aid solution after another over the past few months, realization began to dawn, that government intervention was coming much too little, too late, to avert the damage. The time for proactive regulation and leadership needed to avoid the present mess was two and three years ago. Governments are now left trying to treat the cancer rather than avert its onset.
And as investors bled through one of the worst quarters in history to the end of last week, fear and tension mount. The VIX spiked above 40 a few times in the last couple of weeks. Today it is above 55. Panic has set in. I think it is likely to take more than a couple of days of panic to find this bottom. I suspect selling pressure could escalate over the next several days as investors begin to receive their quarter end statements and pension boards begin to realize what a grave error they made in adding commodities as a passive asset class this past year.
At our firm, for this down cycle, the technical downside tests were defined as 10,000 on the TSX and the Dow, 1,000 on the S&P 500 and 2000 on the NASDAQ. We are now through all of these levels as I write, but for the S&P which has a further 36 points of decline to confirm. We believed these levels were likely in this correction, we simply could not predict whether they would happen in a matter of days or months.
And so the question of the week: will the indices hold and bounce from here?
The risk of this cyclical bear within a secular bear is that they won’t. [If you still do not know what I mean by a cyclical bear in a secular bear, please do read my book—again if need be!]
It would be unusual if markets did not at least bounce back over the near-term to retest these key support levels which now form resistance. If they do bounce here, it may prove to be ‘a’ bottom, perhaps a tradable bottom over the coming months. But the risk that today will not be ‘the’ bottom this cycle remains to haunt passive investors who have already lost so much to date. The elephant in this room is that the lows of the last cycle in 2002 could be in the cards again. Remember that was 760 on the S&P and 5800 on the TSX.
For those that are trying to decide what to do now in this panic phase you have my sympathy. But if you are still exposed to equities, if your advisor is only offering you a passive hold plan, if you still have debt to pay off, if you are playing with a large portion of your life savings in these markets, freezing in terror here is not a solution. Sell into strength wherever possible to reduce your risk.
Even if we are near a cyclical bottom soon, we are likely only half way through this secular bear that may last until 2017. It is never too late to reduce your risk and increase your guaranteed deposits and cash.
Don’t be afraid to let this bear make its final bottom this cycle, without your life savings.
By tactical exposure to the equity cycle you can take back control of your emotions, your psychological strength and your money. See the following chart of the Emotional Cycle of investing. You either get to be the passive lemming or the defensive pragmatist, it is your choice.
Click here for a larger version.
Cory’s Chart Corner
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