Stock market investors get obsessed with market trends: bull markets and bear markets. Mostly they are concerned with the stock market primary trend, and for good reason. When the bulls are running the vast majority make money in the stock market; but in bear markets they lose their shirts.
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Some analysts get real technical, but we keep things simple here. The stock market primary trend is bullish (positive, rising) when stock prices in general are going up. Once prices are up 20% or more from the previous low, bull markets are born. When the price trend reverses and stock prices in general fall 20% or more, bear markets begin. You measure these price trends by following a major market index like the Dow Jones Industrial Average or the S&P 500 Index.
If you could stay fully invested in bull markets and avoid being invested during bear markets, even a small investor could make money in stocks and retire at an early age. Going back to the 1920's, you could have simply held stocks through good times and bad and you'd have made 10% a year over the long term. Simply put, historically bull markets have lasted longer than bear markets. In other words, over time stocks have usually gone up in value.
Since the year 2000, the stock market has not been so easy on investors. The primary trend has reversed a few times, and two bear markets crushed investors. The first decade of the new millennium was the "lost decade" because for the first time in modern history investors lost money over that 10-year period of time. There's a lesson to be learned here in regard to stock market primary trends. First, bear markets are commonly shorter in duration but they can be brutal. Second, a major loss can take years to overcome. Let's look at recent history.
In about a year and a half the market fell about 60% and bottomed in early March of 2009. The primary trend then turned around and a bull market sent stocks up over 60% by March of 2010. How would a $10,000 stock investment perform under these conditions: up 60%, then down 60%? The original $10,000 falls to $4000; and then this goes up 60% or $2400 to $6400. Any way you do the math, it isn't pretty and you did not break even or make money in stocks.
It might be easier to picture a 50% loss followed by a 50% gain. In order to break even after taking a 50% loss, you need a 100% gain to get back to even. Your $10,000 falls to $5000, and needs to then go up 100% for a double to get back to $10,000. Bear markets are brutal, and because of them millions of investors lost money in the lost decade.
A stock market primary trend generally lasts from one year to several. If you want to make money in stocks, pay attention to the market trend. When a bull market goes up too far too fast, lighten up and take some money off the table. When a bear market has investors scared to death and selling out of fear, step up to the plate and start buying. If this sounds easy to do, don't be mislead. It isn't easy to make money in stocks in the 21st century. They used to say that the trend is your friend. The problem is that the stock market primary trend changes; so don't overstay your welcome in bull markets and don't throw in the towel in bear markets at the height of opportunity.
The stock market has risen almost 50% in the last 6 months; happy days are here again, right?
Many believe that is the case. They think the recession that began 18 months ago is coming to an end soon and a new boom is just around the corner. Only time will tell, but let's say I have serious doubts about this thesis. Why?
Am I just a pessimist who is always bearish on the stock market? Hardly. During the last few years I've been bullish and bearish. On October 3, 2008 I turned very bearish and predicted a plunge down to 800 on the S&P 500, a pause, and then a further drop down to the 450 area of the index.
What actually unfolded was the market did in fact drop down to the 800 area and then it dropped again as I predicted, but stopped in the 666 area and reversed. Since then the market has skyrocketed back up to around 1,000 on the S&P 500. So the question is, was the drop down to 666 sufficient to end the bear market or will it eventually drop down to the 450 level as I predicted in October of 2008?
Keep in mind that this crisis began because of excessive debt. Has the debt problems of this country gotten better or worse since 2008? Give yourself a star if you said worse. Give yourself 2 stars if you said much worse.
During this fiscal year the federal government is spending almost 2 dollars for each dollar it takes in. This is unprecedented and must stop soon or will end in disaster. That is unless there is a tooth fairy and we can print and borrow unlimited amounts of money without any negative consequences. Both are wonderful fantasies, but that is all they are.
The nation has lost several million more jobs during the last 12 months too. Housing values have been bull market dropping like a rock and foreclosures are on the rise. Even with the recent rally in the market most 401Ks are down 30% or more since late 2007.
So let me ask you this question. Do you think people who have lost the equity in their homes and are now upside down in many cases, who have lost a big chunk of their 401K, and who now fear for their job are in the mood to run out and go on a spending spree?
Not likely I would say because a) they don't feel like it, and b) they don't have the means to do it even if they wanted to do it. You see the home equity loans have dried up, new credit card offers aren't being offered, and most credit card limits are being lowered.
In addition we have the real threat of interest rates and energy prices rising in the future if the economy begins to recover. This of course will probably choke out any of the "green shoots" that some think they see growing.
So is there another leg down to come in this market? I hate to say it, but yes I believe the market will have another nasty fall starting soon.