It Is Time To Position Portfolios For A Bear Market

It Is Time To Position Portfolios For A Bear Market


Early this week, the S&P 500 was in a free fall. The benchmark index fell more than 11% in only 5 trading days. That is a deep Southside move but not unprecedented.

The Data for the S&P 500 index dates back to Y 1928.

Since then we have seen 26 down moves like this recent one. Almost every time it happened was at the beginning or in the midst of an historic Bear market like Y’s 1929, 1973, 2000 or 2008.

20 of the 26 times, or 77%, the index was lower 1 month later. So, based only on history, probabilities favor additional Southside action in the S&P 500.

The recent bounce up (relief rally or dead cat) in price is common in stocks, as a large drop brings in new buyers. Some buyers action is based on hope that the decline is just a dip in a Bull market. Other buyers are locking in profits from short trades they opened before the dive.

We never know why buyers appear after a large decline, but we do know they often enter the market.

From the history, we also know that short-term bounces in the S&P 500 after a large decline are almost always reversed, this action pivoted from oversold to over bought in a very short frame.

Nothing in the headline news has changed from a week ago.

China and Europe are confronting economic their problems. The US Congress must still raise the debt ceiling within the next few weeks, a repeat of an event that became known as the “fiscal cliff” a few years ago and looms again on the planned parenthood issues.

Such  problems will not be corrected quickly and news events related to these issues are likely to push stocks lower before the end of this year.

Now is a good time to position your portfolio for a Bear market.

HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Bearish (-0.31) Bearish (-0.47) Neutral (-0.23) Neutral (-0.22)

Have a terrific weekend.


Paul Ebeling

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