Watch for Signs of the Bear Market's Demise...Then Pounce!
How long do you suppose this Bear Market is going to last? What comes to mind for me right now as I ponder that question is “death by a thousand cuts,” which is an ancient form of Chinese torture. I think we're experiencing that type of Bear right now. Since I’m not a credentialed financial advisor, the answers (observations) I give are strictly my opinion.
Grin and Bear It
This Bear Market just seems to go on and on, gradually wearing down even the most patient investor. Well, all good – or bad – things must end. Right? Usually true, but in the case of Bear Markets, when?
Dealing with the matter of “when” usually brings up the subject of “capitulation.” What's capitulation, you ask? Here's an explanation from our good friends at Investopedia:
Capitulation in finance describes the dramatic surge of selling pressure in a declining market or security that marks a mass surrender by investors. The resulting dramatic drop in market prices can mark the end of a decline, since those who didn't sell during a panic are unlikely to do so soon after. Capitulation typically follows significant downturns in price, which can take place even as many investors remain bullish. As the downturn accelerates, it reaches a point where the selling by the investors unwilling to suffer further losses snowballs, leading to a dramatic plunge in price.
Bad News Bear
Here's a real world market capitulation scenario:
After a series of depressingly downward portfolio adjustments, Bob, a patient but long-suffering investor, finally decides to sell due to growing fear - or panic. As with many of us, he needs the money for other reasons that, as portfolio values shrink, become more compelling psychologically.
Ann, a seasoned, risk-taking, optimistic, and patient investor, views a downward plunge in the stock market as a sign that it's on the verge of recovery. Bear Markets often end on bad news, so a plunge in the market convinces her to sell her badly-devalued stocks strictly for purposes of raising money to reinvest in a lower price environment.
Capitulation is a tough call after experiencing a long series of “bear hugs,” which is akin to wrapping your arms around the concept of infinity. Usually when an investor “capitulates,” it means he or she is giving up…tossing in the towel. But to those savvy investors among us who can identify and overcome the gut wrench that capitulation often conveys, it can be a very profitable move whether one plans to sell to raise cash, or employs a growing reserve of cash held for such moments.
HINT, HINT: Capitulation often signals that the market has hit rock bottom and is due for a rebound so it's a prime opportunity to buy quality products at significant discounts.
End Time Signs
Signs to look for to affirm that the market is experiencing capitulation include a sustained decline in stock prices accompanied by a sharp increase in sales volume, which together induces panic among even the most patient investors. This can be a very crucial time for investors…a time to fall back on the investment experience that kept them from panicking on the front end of the Bear Market. Stay calm. Make calculated decisions. And avoid the temptation to sell everything when this hopefully “final” market convulsion happens.
In short, constantly review your investment goals and tolerance for risk while awaiting capitulation. When the market is correcting, it’s a good time to start looking for quality stocks or funds to buy, so do some research along the way. If you remain calm, you might be able to take advantage of the inevitable capitulation, and then buy cheap (make some dough). Capitulations are often followed by sustained periods of growth.
Bear Hug, Or...
There are few certainties in life, but one thing is certain: Market corrections eventually stop. The problem, of course, is figuring out when. Is a capitulation occurring or is it just another unfriendly bear hug? What one thinks might be a market capitulation – that the bear is ready to lose its grip on the market – might just be a sign that further losses are imminent.
It always helps to pay attention to current events and other economic indicators in order to understand whether or not a capitulation is at hand. And always…always…invest with caution. Make informed investment decisions, not wild guesses.
In Sum
Being a conservative PDQ (patience, diversification, and quality) kind of investor, I prepare for capitulations not by planning to sell what I already own, but by hoarding cash along the way to buy more of what I already own (mostly mutual funds) at the capitulation’s cheaper prices. It's easier said than done. I also reinvest dividends and capital gains along the way…a form of dollar-cost-averaging…as opposed to - or in addition to - waiting for that difficult-to-predict capitulation. Just a thought.