Market Timing / Market Direction – Bear Market Returns

Goodbye Old Friend, Goodbye – The Bull Market Is Gone

In my opinion the last few days have confirmed the end of the Bull Market that commenced in March 2009 and the return of the Bear Market.  Today’s action definitely indicated any bounce has to be sold into. If the market climbs in the next day or two I will be buying puts. If the market climbs this fall, I will be buying puts as I believe the Bear Market has returned.

With today’s market action, the bears now have the upper hand. The charts below show the market now in peril of moving even lower. The NASDAQ which lead the market since March 2009, holds the only hope for the markets. It has not broken the 200 day moving average and is doing its best to hold onto to some semblance of a bull market.

NASDAQ Stock Chart - August 1 2011 - On The Verge of Entering A Bear Market

However the other charts are not very positive. The S&P 500 easily touched the 200 day moving average. The March 2011 low of 1249.00 is only 3.3% lower. One or two bad days could easily see the market this low.

Bear Market Signs - S&P 500 Chart August 1 2011

If the March Low of 1249 breaks than the next stop will be another 10% lower at 1175.00 and will confirm the Bear Market. The first collapse of stocks from the May high to 1249 marks just an 8.8% retrenchment. But a move to 1175.00 would mark a pullback of almost 19%, which would be a fairly severe correction and more in line with the correction last year before QE2 stepped in and turned the market around. The chance of QE3 is probably limited particularly with the new “austerity measures” introduced today. I also believe QE3 will be too little and too late. Unemployment comes out this Friday and could mark another blow to the markets.

S&P 500 Stock Chart for 2010 to 2011 Bear Market confirmation with a 10% lower move

The July 18 2011 XLF low was $14.46. Today the XLF reached $14.62. From its high of $17.20 on Feb 18 2011, the XLF has fallen 15%. I have pointed out a number of times that the financials have been in their own Bear Market since Feb 2011.

With no real outlook that would point to a recovery in financials, the stock market is going to have a very tough August.


BEAR MARKET RETURNS – SUMMARY

In my opinion the bull market is over and the bear market is beginning. This doesn’t mean stock prices will collapse, but it does mean that the strategy of selling puts has to be carefully implemented unless you want to be assigned stocks at what could end up being higher levels. Selling puts is a much better strategy for bull markets unless the investor is interested in owning stocks at the strike levels sold.

I will write an article shortly on selling naked calls which is a much better strategy in a bear market.

As I believe this is now a Bear Market, I will be purchasing SPY puts on any bounce higher. Meanwhile for my positions that have covered calls, I will be taking opportunities in any rise in stock values to sell calls in the money as I am sure that many of the covered calls once sold in the money, will eventually end up out of the money as stocks pull lower.

A Bear Market is a different type of beast. They have sideways actions, big bounces and bigger sells. The bear market of the 1970’s lasted almost the entire decade. It was a great time for option premiums. The bear of 2000 to 2003 and 2007 to 2009 were severe with losses of more than 50%. The chance of this bear market seeing such collapses is probably as great as any previous ones.

Just remember that bear markets take months to unfold and normally collapse near the end. Inbetween there are lots of opportunities to make profits. There is no need to fear a bear market but learn to embrance the bear market. It is worthwhile implementing different strategies and remaining conscious of the fact that the bull market is probably ending.

My financial investment strategy since January has been the cautious bull. As I now expect volatility will increase I look forward to higher option premiums and more profit as the market direction has definitely changed.