How can you tell if we’re in a bear or bull market right now? For some investors, that may not matter. Here’s why.
To figure out if we are in a bear or bull market right now, let’s talk about baking bread. For one thing, it’s always better to make investment decisions on a full stomach. But before we get to that point, let’s look at the four main ingredients: flour, water, yeast, and salt. You can add to that if you like. Nuts, seeds, and herbs can all make your bread unique, but you only need those first four ingredients to make a basic (and tasty) loaf of bread.
With those four ingredients, however, there is a lot that can affect the way your bread turns out. Using different flours will result in different flavors and textures. Especially humid or especially dry days can alter the way your bread rises. How you knead the dough and how long you let it proof will change your results.
Investing is not entirely different. Just like you can use four ingredients to get anything from a French baguette to a rustic Country loaf, you can use the basic rules of investing for a conservative or aggressive portfolio, a growth-oriented strategy, or a value-based approach to investing. It’s all in how you use your ingredients. But what does that have to do with whether we’re in a bear or bull market right now?
[text_ad]
Are we in a bear or bull market right now? Here’s why it might not matter.
As a quick review, the definition of a bear market is when the market indexes fall 20% or more from the highs on a closing basis. Every bear market has its unique horrors. There is always a sense that this could be “the big one.” That this will destroy investing.
Since 1926, a bear market has come along an average of about every six or seven years. The average bear market has lasted 1.3 years and with an average loss to the bottom of 38%. And that number factors in the Great Depression.
A bull market is defined as continuing as long as each successive advance of the primary trend peaks higher than the one preceding it. Rising prices and growing optimism characterize a bull market. The average bull market has lasted 6.6 years, with an average cumulative total return of 339%. Since 1926, it has been a bull market about 86% of the time.
It is difficult (some would argue impossible) for investors to precisely time bull markets and bear markets. That’s because markets often rise higher than most investors and analysts anticipate—and sometimes fall lower than they could possibly fathom.
While news items can obviously move individual stocks (earnings, etc.), the reality is that, if you’ve studied history, the market is generally going to do what it’s going to do. If it’s a bull market, the market will tend to ignore bad news, and if it’s a bear or corrective market, worrisome news (or even unsourced reports!) will cause the major indexes to fall apart.
In other words, instead of over-interpreting every news item and trying to predict what it means for the future, it’s far better to just follow the market’s action. Said another way: It’s not the news that counts, it’s the market’s reaction to the news that counts.
Bears or bulls? It’s time to look beyond the labels
So regardless of whether we’re in a bear or bull market right now, you’ll end up ahead of 75% of investors if you dedicate yourself to following the market’s trend, up or down, and not judging it. One of the big advantages of being a trend follower is that you don’t have to worry much about the dozens of overbought/oversold market indicators out there.
There are some market indicators we do watch, though. The first and my favorite is the 2-to-1 Blastoff indicator. It happens when, over a span of 10 trading days, the NYSE Advance-Decline Line averages a positive 2-to-1 reading. Translation: Over two weeks, every day averages at least twice as many advancing stocks as declining stocks.
Here’s another quick tidbit that most investors forget from time to time. The way you make money in the stock market is by holding stocks, not buying or selling them. Many times, the stocks you purchase don’t do an awful lot for many weeks after your initial investment. But if you have the guts to stick with those stocks, some can turn out to be huge winners. And in the end, those big winners are what make all the difference.
What are your thoughts on bear markets and bull markets? How much do you pay attention to these kinds of trends? We’d love to read your thoughts in the comments.
[text_ad]