Last Friday I issued a flash update that the
market condition changed to Strong Bear Volatile due to the action on August 4th.
However, a miscommunication between me and my staff led to the addition of a suggestion at the end of my comments that our readers should tighten their stops. I donât agree with that. Your system either works in bear volatile markets or it doesnât. Tightening your stops would amount to changing your system, and Iâm totally against that.
Several people responded that the update disturbed them. For example, one person said:
Anyone selling now is a fool to sell as issues bottom. This happened so fast; the best approach would be to anticipate, not react. Good luck to the little guy on doing that. On long term investments (5+ years) I am ignoring stops and buying quality stocks that will rebound nicely when this storm passes. I am struggling in being a believer in your methods with markets like this.
I would like to respond to this reader for the benefit of everyone who responded similarly and for those who didn't contact us, but who had similar thoughts.
First, everyone trades their beliefs. And you are right about whatever you believe. If you want to trade long term (i.e., five years or more) with no stops or exit point, go ahead.
Second, we are in a secular bear market. Secular bear markets end after the major indices hit single digit PE ratios and dividends on major stocks reach around 6%. We are a long way from that. This is just pure observation. Depending on the estimates for earning, the PE ratio of the S&P 500 currently varies between 15.4 to 22.3. That is a long way from single digits and PEs could bottom out at the end of the cycle as low as 5-7. Could you withstand the S&P 500 going down to between 400 to 600 from its current level at about 1150? Holding on through such a drop means you would have to make well over 100% just to get back to todayâs level. Are you willing to take that chance?
Most secular bear markets are not necessarily supported by weak fundamentals in the economic picture. However, the current conditions are the worst fundamentals for the economy that we have seen in a long time. Finally, Standard and Poorâs just downgraded the United State Government debt to AA+. This is the first downgrade in the history of the United States and it has serious implications. Unless the US government totally finances the debt with more debt, it will probably be impossible for short term interest rates to stay near zero after a such a downgrade.
Third, for people who believe in holding positions long term, please take a look at the charts by Crestmont Research. You will see that long-term investors may have to wait 20+ years to get positive returns out of a buy and hold approach.
Fourth, I told people in December of 2007 that market conditions were bearish and the stock market was for trading only (not investing). The S&P 500 dropped from 1468 to the low 700s. It recovered somewhat to the mid-1300s recently, but it is clearly heading down again. If you ignored my warning in 2007 and held on to your positions since then, you have yet to make your money back in nearly four years. Plus, if your holdings were in US dollars, you've had a larger loss relatively to the value of other currencies and gold. The US dollar has fallen dramatically, and weâve had (according to Shadowstats.com) 10%+ inflation during that time. Is that smart investing?
...
So please, if you are a firm believer in buy and hold, at least look at the chart from Crestmont Research.
It is just my belief that buy and hold during a secular bear market is dangerous to your wealth, but I think it is a useful belief.
And just to keep you updated, the current market type charts are shown below. They show us in
Strong Bear Volatile market conditions.
