Published on 30th October 2018
Are you prepared for a bear market? The good news is that it is probably not too late to get prepared. The biggest opportunities are most likely still down the road. However, it is time to get prepared swiftly.
Which evidence do we have regarding the probability that we are about to enter a cyclical correction? Statistical evidence suggests that the current cycle is at the very long end in comparison to what the US economy witnessed during the past 150 years. The long-term analysis cannot time the beginning but a longer-term technical analysis perspective suggests that the stage is set for a cyclical correction. The conclusion of that technical analysis was that a breakdown of the short-term trend is the missing link in order to trigger a cyclical trend reversal. Exactly that missing link came together during October 2018. The weakness of the past few weeks was broad-based across risky assets. Some of the major equity indices worldwide broke their trends that formed back in 2009. Our conclusion that a topping process is currently unfolding got even higher odds. The result is a bear market is very likely. Its goal is to correct the progress equities achieved since 2009.
Does it make sense to unload equities right now? It is probably wiser to be patient and monitor the market development closely. Right now, equities are probably correcting the sharp sell-off that we have seen during October 2018. It has been the worst month for US equities for seven years. The chart below shows our analysis on the S&P 500, which we distributed to our clients. It shows an impulsive move from the all-time high. Such action gets followed up most often in the Elliott wave framework. The countertrend bounce is probably still too small to be complete. There will be most likely more retracement to the upside during the next few weeks.
Is that it? Exit and wait for the next two years? First and foremost, it is important to protect capital during bear markets. The last two bear market corrections erased more than a half of equity value. Bear market bottoms are buying opportunities that do not arise often over our lifetime. Second, it doesn’t necessarily mean that cash is king and yields no return. Assets can be allocated differently. Last but not least, there are enough instruments to take advantage of a market sell-off. The exercise just changes from buying the dip to selling the rally. Bear markets are big opportunities for those who understand the big picture and risks for those who don’t.
Our premium short-term analysis focuses on identifying dips and countertrend rallies within their paramount trends.