Last week, Green Zone Fortunes Co-Editor Charles Sizemore and I talked about the market’s recent climb after a reader asked about the chances of it being in a bear market rally in our Ask Us Anything video series.
While the upward momentum reversed during last week’s trading, stocks are still well off their June lows. And there’s still plenty to take away from our conversation, including our takes on if this bear market is over.
You can watch the video below or keep reading for highlights.
Bear Market Rally or New Bull?
Matt Clark: Brad emailed us and he asked a simple question, Charles, but it’s something that might be a little more complex to answer.
Brad wants to know: Are we looking at a bear market rebound?
Charles Sizemore: Is it a bear market rally, or is it a new bull market?
And then the second question is, of course: Does it matter? I’ll answer that second part first: No.
You never know 100% until hindsight whether the market conditions you’re in are just a bear market bounce or if they’re the beginning of something new. You don’t know.
You have imperfect information.
Whatever you do as an investor, as a trader or anything in between … it’s always an exercise in making decisions with imperfect information.
You make the best decision you can.
And then, of course, you protect yourself in the event things go the wrong way.
In our case, what are we doing?
- Identifying good, strong mega trends that have staying power.
- Searching for stocks that are exhibiting good, strong momentum in a difficult market.
- Looking for something that should do well, whether the market goes up, down or sideways.
But apart from that, we’re also protecting ourselves in case something comes out of left field.
We protect ourselves, and we wait for the next opportunity.
That’s kind of the more important takeaway.
Why the Recent Rally Fizzled
Charles: As for the first part of that question: Is this a bear market rally, or are we in the early stages of a new bull market?
I would say I think we’re in a bear market rally.
The reason I say this is because one of the things I look for is evidence of a big institutional buy.
That has been absent over the last two months.
What we’ve seen is a lot of short covering.
A lot of people that were profiting from stocks falling bought those shares back, because that’s how a short sell works.
When you short, you have to borrow the shares from somebody else first, you sell them and then you have to buy them back to pay back the person who you borrowed them from.
You may not know that if you’re the one shorting because it all happens behind the scenes at your brokerage.
Those shares you sell have to come from somewhere, and they come from somebody else’s account. You are obligated to buy them back and replace them.
That’s what happens after you’ve had a big decline. The shorts start closing out those positions, and that creates buying pressure in the short term.
But the institutional money has been sitting on the sidelines.
That could change tomorrow.
The institutional money could start piling in starting today.
A lot of times, a bull market starts with that short covering.
And then you get some of those more agile traders getting in, which brings big money. And then you know that you may have a good runway.
Again, that could happen tomorrow, but we haven’t seen it yet.
Until I see that, I’m going to view this as a bear market rally and not a new bull market.
Markets Are Always Unpredictable
Matt: I think the bottom line in terms of how I’m viewing this is that first off, nobody here has a crystal ball that can tell you for sure what’s going to happen in the future.
Is this what’s going to happen down the road?
The answer is we don’t know.
We are seeing some movement that would indicate that we are maybe lifting ourselves out of a short bear market.
But then again, if you look at some other indicators, this is a temporary move, and we could see another leg down here in the immediate future.
At the end of the day, Brad, we don’t know.
I’m kind of with Charles here in that I think we may see some pain ahead, but I think we may see a little bit longer runway in the future.
But again, this is not your dad’s stock market.
It’s not a market that trades on strict fundamentals and technicals.
This is a market that trades on things we can’t even fathom.
It trades on headlines.
Fall Months Could Bring Volatility
Charles: Well, Matt, another factor as well is that we are entering this September and October period, which historically has been a time where volatility can happen.
Matt: Yes.
Charles: Volatility can happen at any time, of course.
But some of the bigger crashes, spikes and volatility in history have happened around this time of year, September and October.
This doesn’t mean it will happen.
But there’s historical precedent for it.
It gives us another reason to be cautious at this time and not just say: “Hey, bear market’s over. Everyone back in the pool.”
Matt: I think what might be an underlying thing here for Brad’s question, and maybe for other people who are thinking about this as well: Is the market going up. Or is it going down?
It’s one day to the next.
What do we do?
We preach this a lot, and I think it bears repeating…
Whether you are a day trader or just you’ve got some money to tinker around with … you’re going to play around in the market, see if you can make some money…
No matter what the market is doing, if you have a strategy, this is the time that you need to stick with it.
Hold to your stop-losses. Hold to your buy limits.
Charles: And don’t relapse your rules.
Matt: Right.
So if you’ve got a stop-loss on a stock, and that stock hits it, but you love the stock … you have firm conviction that something will happen with this stock in the next five, 10 years. It’s going to make you a millionaire…
It doesn’t matter.
If it hits the stop-loss, you sell.
That’s it.
Charles, myself, our Chief Investment Strategist Adam O’Dell, we’ve run into this situation where we have a stock that we believe in.
We have a mega trend that this stock buys into and is a big player in.
However, the market doesn’t always work the way we’d like it to.
So we have to sell the position because it meets our stop-loss.
It doesn’t mean we’re any less bullish on the company or any less bullish on the mega trend.
It’s just the market is telling us that now is the time to get out.
And then we reevaluate later when we see maybe some more indication that the stock is on a confirmed uptrend, and we get back into it.
Charles Sizemore: When you sell a stock, it’s not a divorce.
Matt Clark: Exactly.
Charles Sizemore: You’re taking time off to work on yourself.
Matt Clark: You’re taking a break.
Charles Sizemore: You can always get back together.
That’s an important thing to remember.
Nothing in investing ever has to be permanent.
To hear more of our discussion, click here to watch the rest of Ask Us Anything.
Remember, if you have a question about the market or the economy … or really anything else … email your question to Feedback@MoneyandMarkets.com!
Until next time,
Safe trading,
Matt Clark, CMSA®
Research Analyst, Money & Markets
Matt Clark is the research analyst for Money & Markets. He’s the host of our podcast, The Stock Power Podcast, as well as the Marijuana Market Update. He’s also a certified Capital Markets and Securities Analyst through the Corporate Finance Institute. Before joining the team, he spent 25 years as an investigative journalist and editor — covering everything from politics to business.