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How To Profit In The Chaos Of A Bear Market

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Bear Market conditions, long drawn out periods of selling, are natural within any financial market cycle. We explore what makes a bear market and what you can do about it.

Bear market 2018? It’s highly unlikely, but that doesn’t mean you shouldn’t be ready. Find out why we don’t expect to see a bear market in this article.

ETFs are a great way to gain exposure to a sector or index. We detail our top three Bear Market ETF choices for superior returns in up and down markets. Click Here To Go Straight To Our Top Bear Market Proof Stocks


bear market

How To Prepare For A Bear Market

Some would argue that there is always an equal number of buyers and sellers in the market at a given time. This is a common fallacy. While it is true that there is always a buyer and a seller in every trade, the numbers of buyers and sellers in the market is not always equal. It is the inequality in numbers that creates price movement, when more people want to buy than sell stock market prices go up until they reach a level at which more people want to sell. When stock market prices reach a high enough level, or when conditions change for the worse, the market may attract enough sellers for a bear market to ensue.

Price discovery is an important function of free financial markets. It is the net result of buying and selling, the value of the market, an index or asset at any given time. When an asset is fairly valued it will trend sideways at or near its fair-market value. If traders are uncertain of the value or other concerns are present the assets price may be volatile, it may move in a wide range around its fair market value. When the balance of sentiment shifts in favor of the bears prices will fall.

What happens in a bear market is that, as prices fall, the number of people willing to buy an asset at a certain price point will get used up. When that happens the price of the asset falls to the next level where people are willing to buy. If the bear market gains momentum, if the number of market participants who want to sell increases, prices will fall faster. As prices fall fear builds up adding to momentum until eventually, everybody who wants to get out of the market does. When that happens a capitulation event will occur but that’s another matter.

Before I go on it is important to note that a bear market can occur in a stock, an index or the entire market. The broad market may be in a bull market, but conditions could develop for an individual company or sector that results in a bear market.

How To Identify A Bear Market In Four Easy Steps

The Most Important Factor For Bear Market Conditions

The fundamentals are the most important factor of investing. They are the canvas upon which the market paints its picture and that picture is the price chart. When the fundamentals are sound prices are able to move up over time, regardless of periodic correction. When the fundamentals are not sound prices will drift lower until something changes. In terms of the stock market, investing and trading fundamentals represent the long-term, years(decades in some cases) versus days, and begin with the secular market.

The secular market is everything and everybody that exists within a market. While there are many factors that drive secular conditions the most important, at least in the case of the US market, is demographics’. Demographic imbalances have been driving US stock markets for many decades. There was an underlying factor causing the secular bear market of 2001 to 2012 and why the market is in a long-term bull market now.

In the time from 2001 to 2012 the Baby Boomers, the US largest demographic group in history, was approaching retirement. As all savvy investors know, as you reach retirement you begin to sell out of your risky assets, your stocks, in favor of less risky assets. Since the following generation, Generation X was so much smaller a situation developed in which prices had no choice but to fall. There was a correction in 2008, the Housing Bubble, but that only led to a second wave of selling as Boomers wishing to retire fled the market.

Bringing it all forward, the Baby Boomers are well on their way to retirement. The youngest will be 54 this year putting them past an age at which retirement selling has begun. The oldest, nearly 73, has finished their retirement selling and living off a life of hard work. The question is this, with retirement selling finished among the Boomers, and a much smaller group of Generation X left behind, what is left to drive prices?

The answer is the Millennials. The Millennials are now the largest demographic in American history, and they are having a positive impact on the economy. Generationally speaking, the leading edge of the Millennial generation is turning 34 years old and at an age where max employment is reached, swelling the economy with new workers.

What this means for traders today is that a bullish imbalance exists at a fundamental level within the market. Will there be a bear market 2018? Not likely but if one were to develop it would likely not be very long or deep and, when it did, would provide an historic buying opportunity for long-term investors.

Earnings Growth Is Important, Follow The Money

The stock market is all about earnings. Earnings are what drive price discovery. A company’s value, its valuation, is based on its earnings. If a business is making money, it is worth more than one that isn’t so it is natural to assume that when a business is growing earnings, it is worth more than one that isn’t. In the case of a bear market earnings growth may have stopped or worse, earnings may be in decline. A company with earnings in decline is a company that is shrinking in value, and when it shrinks in value, its share prices fall.


Earnings growth has been quite strong over the past two quarters and is expected to be strong during the upcoming 1st quarter 2018 earnings cycle (+16%) and for the full year os 2018 (+18%). This is important to note because it means prices for stocks are more likely to trend higher than lower over the next 12 months or longer. The full year 2019 outlook is also strong but cools to a tepid 10% so it’s possible the secular bull market could stall by the end of the year but there is risk in that assumption. With economic momentum accelerating it is likely current earnings estimates are too low. If so, it will provide an additional catalyst for stock prices when earnings estimates are beaten and forward guidance is raised.

The Outlook Is Important To Your Bear Market Success

The economy and the market are tied together. When the economy is doing well, businesses can make money and when the economy isn’t businesses can’t. When businesses aren’t making money, their value declines and share prices move lower with them. Knowing what economic conditions are is one thing, being able to spot a bear market means having an idea about what they are going to be like next year and the year after. If conditions are expected to be better next year the chances are businesses will do better, earnings will do better, and the prices for their stocks will rise.

Current economic conditions are good in the US and globally. Along with that, they are expected to improve over the long term. All four of the world’s major central banks agree. The US Federal Open Market Committee (FOMC), the EU’s European Central Bank (ECB), the UK’s Bank of England (BoE) and Japan’s Bank of Japan (BoJ) have all issued policy outlook during the first quarter of 2018 calling for continued and accelerating expansion within the global economy. Not much reason to expect Bear Market 2018 to happen any time soon.

The Most Important Piece of the Puzzle

The technical analysis is the final piece in the bear market puzzle. It is the scientific study of financial markets through price action and done with price charts. Technicians employ numerous tools to measure the health, strength and momentum of a market including but not limited to oscillators, momentum indicators and Fibonacci Retracements. Bear market conditions are usually easy to spot. If a market has been in rally mode and reached a top, a point of reversal, reversal signals like Head & Shoulders and Double Top point the way lower. If the market has already entered correction the charts can tell you if the correction will go deeper, if a bear market is on the way, or if it is merely a regular, healthy function of the bull market.

Using the broad market S&P 500 as a gauge for the US stock market the technical picture looks very bullish. The market has entered a correction and trading near long-term support targets (the 150 day EMA and a key uptrend line) but those support targets are holding. Indicators like MACD and stochastic suggest the support targets could be tested again but a deeper correction is not expected with earnings growth and outlook so robust. What is expected is consolidation and sector rotation in the first half of 2018 with the market moving higher in the end of the year.

Tips For Beating Average In A Down Market

Can you beat a bear market? Sure, but that is not the question average investors should be asking themselves. Beating a bear market is possible, doing it comes down to precise market timing and a high degree of market savvy. What forward minded investors need to ask themselves is this. Can they still make money in a bear market, and are they prepared for one when it shows up?

Stocks To Buy Before A Bear Market Can Damage Your Portfolio

Just like insurance, it’s best to own bear market-proof stocks before you need them else you end up paying too much. The good news is that many of the stocks you want to buy for bear market protection perform well in a bull market. The only problem is that they underperform the broad market which, ultimately, provides a discount for investors looking to buy them.

What stocks are good in a recession, what stocks are recession proof are the questions you don’t want to be asking yourself when the market is in a tailspin. Consumer Staples, Utilities and Telecom are the best stocks to own in a bear market without question because they share one thing in common; we can’t live without them. We may cut out discretionary items, industry may slow down production, growth markets may slow but we will not give up our toilet paper, cereal, beer, electricity, water, phones and Internet.

If you don’t believe me believe this; these sectors averaged, during  the 2011 bear market, a decline of only -6.3% compared to a much bigger -20% for the broader market. They also pay dividends above the broad market average which helps make up for any underperformance they may experience during bull market conditions.

Superior Bear Market ETFs Your Portfolio Needs Now

The Vanguard Utilities ETF – The Vanguard Utilities ETF is a utilities focused ETF yielding 3.5% with shares trading near $112. This one is a little expensive on a per share basis but you get what you pay for, quality. The fund has better allocation, lower fees and superior performance when compared to the lower cost SPDR Utilities ETF XLU. This ETF is focused on large and mid-cap players across the US with an emphasis on the larger cap players. Top holdings include NetExtraEnergy, Duke Power and Dominion Energy for nearly 25% of the portfolio. While it is a great holding for bear market protection it has also produced positive returns in the bull market, just not as much as the broad market S&P 500.

Consumer Staples Select Sector ETF (XLP) – The Consumer Staples Select Sector ETF is a consumer staples focused ETF in the SPDR family. It delivers a sector leading 2.85% at current share prices, near $52.50, and expected to see steady growth over the next 5-10 years. Household growth has been in an uptrend since the early 1950’s and fueling demand for household goods and other everyday items the US consumer can not live without.

The portfolio is skewed toward mega and large-cap stocks, small and mid-cap make up less than 5%, with mega-cap claiming the lion’s share at 55%. The top five holdings are no surprise because they are all pillars of the consumer goods industry; Proctor & Gamble 11.6% of the portfolio, Coca-Cola 9.6%, PepsiCo 9.0%, Phillip Morris 9% and Wal-Mart 9%. The beauty of the portfolio is that it is diversified across the industry as well as the supply chain. The top four holdings all make consumer products and the fifth, Wal-Mart, sells them to the public.

Vanguard Telecommunication Services ETF (VOX) – The Vanguard Telecommunications Services ETF is another high-quality play from the Vanguard line of funds. While it does cost a bit more than funds like the SPDR Select Sector Telecom ETF (XTL) at $84 (compared to $68), it also pays a substantially higher dividend. At current prices forward yield is above 4% but we don’t expect that to last long. Investors looking for safety and protection from down turn will drive share prices up and push yield down.

This fund is more balanced regarding market cap but it is heavily invested in mega-cap at 55% and small-cap at 28% of total portfolio. The top holdings, Verizon and AT&T, are the US largest telecom providers and lead sources of income for the fund. They each yield 5% or more at current prices and have history of dividend increase. We expect to see this fund continue to perform positively over the next few years although it is not likely to lead the market in terms of capital gains. What it will do is provide safe, steady returns, high income and protection for your portfolio in the event a bear market should develop.

Bear Market 2018, It’s Better To Be Safe Than Sorry

Is a major bear market forming in 2018? Not very likely, not if earnings growth, economic outlook and underlying fundamental conditions have anything to do with it. However, that does not mean that all stocks will rise, or even all asset classes, or that you should not be ready for one.

The good news is that the stocks and ETFs you want to buy aren’t bad investments. They probably won’t see the same gains as higher-profile stocks but they also won’t see the same declines when correction sets in. Bear Market 2018, don’t expect it but you should still invest in our top three bear market ETFs just in case.