The Impossible Recognition Of A Long Term Bear Market

Bear MarketThe reason why there is a market in the first place is that people believe different things at the same time.  For example, if I thought the value of shares I own in IBM would be worth less tomorrow than they are today, I might sell them for obvious reasons.

However, most people who call themselves investors fail to realize that each and every time they buy or sell a stock, bond or any other asset, there is somebody on the other side of that transaction who thinks completely different, in fact the exact opposite.  That is what makes a market.

There are countless financial analysts, strategists, forecasters, stock pickers and the like who believe we are in a bull market, one that began after the most recent credit crisis around March 2009.

For example, one in particular named Doug Kass who is the founder of Seabreeze Partners which manages several investment funds, came on Tout TV (aka: CNBC) and called March of 2009 a generational low.

On the flip side, there are many who believe we are in a bear market, one that began way back at the tech wreck, aka – dot com bubble from March 2000.  It’s interesting to note that there are usually way more bulls than bears, most of the time.

Our research indicates that while there has certainly been a phenomenal rally from March 2009 until May 2011 with a few bumps along the way, it is far, far from a generational low.

Our indicators are very clear that this was nothing more than a bear market rally in the midst of an enormous correction of the largest bull market in history that occurred from 1982 until 2000.

It’s important to note that throughout history, most bear markets tend to last on average about 16 years.  This does not mean a market goes from high to low in a straight line, wipes out wealth, rings the bell at the bottom and signals “all clear.”  That couldn’t be farther from reality.

There are periods of time where counter trend rally’s exist, some for weeks, months or even years.  Again, our work indicates we just ended a very large counter trend rally within a long term bear market.  Of course, this proclamation is debatable, which is again, what makes a market.

One of the reasons why the majority of investment managers, mutual funds, brokerage firms and others who manage money find it difficult to discuss, recognize or even accept a bear market is that conventional wisdom takes over and most people heed to an industry dynamic that over decades has trained us to think the market always goes up, therefore you must “buy on the dip.”

It may be apparent to only a fraction of market participants, but the ecosystem created by the financial services business is so powerful with it’s long standing message of bullishness, that it may take an absolute collapse and widespread destruction of wealth to bring reality to the foreground.

The Retail brokerage firms are a prime example:  Most of the individuals who work within these organizations have no idea or can’t see and realize how many conflicts of interest there are.

It doesn’t take much to analyze their blueprint to see how the cards are all stacked on one side of the table.  They make money in a few primary and obvious areas:

  • Selling stock, bonds and mutual funds
  • Managing portfolios for a fee – generally a percentage of the total assets
  • Manufacturing and selling “structured products” on a particular stock, index or segment of the market.  These tend to be complex and have high commissions (It’s like a casino, the house always wins)
  • They sell and distribute research on companies, industries and various global markets

There are certainly other areas of their business that provide revenue and significant profit, but for the most part, these act as the engine that fuels the business.  After all, without having your money in their house, they don’t stand much of a chance.

So the blueprint looks something like this:

All the firms advertise wealth management processes.  They claim to be able to construct long term strategies that will fulfill the dream of retirement and living the life we desire.  The marketing is not that difficult, they are telling a message we want to hear, therefore we tend to believe it, because we simply want to.  The research departments prepare fancy reports that show why a particular stock or market will be higher later than it is today.  Why do we believe it?  The report says that if I invest money in this stock or market, I’ll have more later than I do now.  We want to believe it!  Again, most people don’t question it, they simply assume the report is good research and since my broker recommends it, it must be fine.  Have you ever noticed that when the market is going up you hear nothing but bullish discussion and how you must be invested because the firm just raised it’s forecast, and “we” believe the market is going higher.  Whenever the market goes down, you hear that “investing is for the long term and you can’t sell because you’ll miss the next big up swing.”  Either way, they need you to be invested.  This is the foundation of the problem.  (The forecast we’ve yet to hear from any firm is the one that sounds like this: “Since the market has just gone up a bunch in a short period of time, we think you should sell and stand aside.”)

Imagine hearing from your broker or seeing an advertisement on television that said, “we think the market has topped out for the foreseeable future and recommend you take all your holdings and move them to short term treasuries and CD’s for a while.”  That will never happen because of one simple issue – they will lose revenue.  The entire industry is based on hope.  They hope the market goes higher so you keep buying their story and stay invested.  They always forget to mention that cash is an asset class.

It’s fascinating that most people have no idea the stock market measured by the Dow Jones Industrial Average is basically flat for the last 10 years, and down about 50% as measured by the Nasdaq market index.  Since 2007, the Dow Jones average is down about 30 percent, yet most still remain bullish.

One of the prevailing factors that cause this phenomenon is emotion.  Without getting into psychology 101, consider that when you watch Tout TV and a mutual fund manager discusses why he thinks a stock or the general market will move higher, they have no choice but to tell you it will.  Their income and existence is totally dependent upon the market moving higher.  Unknowingly, they will come up with countless reasons to justify their bullish case.  Their fund will only go up if the market goes up, their income will only increase if the fund has a positive return.  The majority of funds can only buy stocks or bonds, and therefore they need the market to move in only one direction.  Their emotions won’t let them think any other way.

A similar example would be a government official or CEO of any company on TV stating what their forecast is for the next several months or years.  Have you ever heard a CEO state that they think the forecast for their company is poor?  They would be immediately terminated by the board of directors and morale at the company would begin to plummet.  He or She can only state one thing, our outlook is positive!  It’s just statistically impossible for every company to do well all the time.

This is where realism and hope diverge.  All the people whose career, income and existence is perceived to be tied directly to a bull market, are locked in the “hope” triangle.  The people who recognize we are in a long term bear market with the probability of getting much, much worse before it’s complete have an opportunity to protect their assets and even prosper during such a time period.

As usual, most investors will remain bullish until the final acceptance phase where all hope is lost, at which time they will throw in the towel, giving way to the opportunists who will then recognize a once in a lifetime buying opportunity – of course at much lower levels than we are today.  There will be many rally’s along the way to instill hope to those that live in the triangle, but we will most likely make lower highs and lower lows for a few years to come.

If you stop and think for a minute, who do you want to be getting your investment advice from?  The person who is paid to be bullish, or the people who only keep their customers when they make accurate and meaningful forecasts.

Please take a moment to check out our site and even spend about six (6) minutes watching our video that describes what we do for our subscribers.  Our regular readers and loyalists have the blue print for how to diversify their investments, certainly different than the mainstream methods.  They understand how to stay safe in this environment and of course, how to profit from all market environments.