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Comparing The Bear Markets of 2000 to
2003 and 2007 to 2009
Two Bear
Markets Compared
On Friday I sold my SPY puts (which
in hindsight with today's (Apr 18 2011) market pullback was
a mistake)
after I spent Thursday night looking at my charts from
the 2000 - 2003 bear market. I felt I much prefer "day
trading" the SPY rather than buying when I "guess" the
market looks like a pullback might be in order.
A lot of the reason for wanting to
stay with trading the SPY on down days comes from my
charts from the last two bear markets and what I believe
is happening now to the stock markets. Below is the
chart of the bear market of 2000 to 2003. I have
highlighted in light blue where the majority of
investors were during that period. In 1998 to almost the
end of 2000, investors were in a buying mood.
Even when the market topped in 2000, and began a
pullback, investors were told in the fall of
2000 that the bear market was over and the
upswing would continue.
The NASDAQ though would never
recover from the dot com bubble. So even in the fall of 2000
investors were in a buying mood. But the bear market had
already started and by the end of 2002 to early 2003 the
market bottomed after collapsing 50%. Just as in the bear
market of 2007 to 2009, some investors starting buying again
in early 2003, but the
majority of investors did not buy or "average
down" as the saying goes. Instead they waited for the
market to start to recover. These buyers then became
sellers and it took 32 months for the market to break
through all the sellers. But the recovery from the bear
of 2000-2003 had a lot going for it, sub-prime mess was
just getting started and a lot of investors who lost in
the dot com bubble were pumping money into real estate.
Debt issues were not discussed, gold was reasonably
priced, oil stayed under wraps, bush had tax cuts that
certainly helped fuel stock prices and well, it just
seemed a better time, didn't it.
Below is the bear
market of 2007 to 2009. Once the market broke
through all those investors who were selling from the
2000-2003 bear market, in October 2006 you can see how
the market set new highs. Buyers after October 2006,
picked up shares at pretty lofty levels including right
into the fall of 2007 when the market made a new high.
The subsequent drop was, by the end of 2007 being
labeled as the end to that "mini-bear" market.
Investors loaded up on
what they perceived as discounted stocks and indeed
analysts everywhere pointed out how inexpensive stocks
were. Actually stocks were fairly to fully valued. The
market collapsed again, falling 57% before bottoming.
Stocks yet again became undervalued but just as before,
only a small number of investors were buying.
Starting in March 2010
the S&P has been hitting up against the resistance of
the enormous numbers of sellers who have been waiting to
get out of their positions from before the latest bear
collapse. Just as in the previous bear, (2000-2003 chart
above), the number of sellers is enormous and most want
out completely. They have had it with stocks after twice
being burned. A tremendous number of these investors
have not made any money in a decade. They just want as
much of their capital back as possible.
So far the S&P has only
been in the resistance level for perhaps 13 months and
if I take out the period of last summer 2010, when the
S&P pulled back more than 15%, it has only been in the
resistance range for 9 months. As mentioned, the
previous bear recovery through resistance was 32 months.
This time the S&P has only been in resistance for 13
months. There is a long time period to go before the
market breaks through resistance.
The Headwinds For This Recovery
I am not sure the market can break free and move to a
new high, this time before it moves lower. No other
market in the past 35 years has had the problems this
market faces. The sovereign debt issues are decades away
from ever being resolved, high oil prices are crimping
the economy, Japan's earthquake, tsunami and nuclear
meltdown will have far reaching economic repercussions
that the market has not yet experienced. The US housing
market just keeps well, falling and unemployment remains
a stubborn issue. Economists talk about China like it
can save the world. Somehow economists seem to think
that they will overnight become a nation of a billion
and half consumers, loading up on real estate,
furniture, consumer electronics and more. It is utter
nonsense. The US GDP in 2009 was 15 Trillion dollars.
China was reported to be 5 Trillion. Unemployment even
by Chinese statistics puts urban unemployment around 9
to 10 percent and rural unemployment between 20 and 30
percent. The average American income is 48,000 in 2009
versus 4,000 in China. There are so many fundamental
economic flaws within China that still must be tackled,
that it is just plain silly to think that China will
"save the world" from economic disaster.
Meanwhile baby boomers
are starting to retire although now many question if
they can afford it. Oil is definitely too high and gold
and most commodities are double and often triple where
they were at the end of the 2003 bear market. A lot of
Companies have refinanced at incredibly low interest
rates, but a lot of their terrific growth has been
through cost cutting and laying off employees. As well,
the massive debt loads in all developed countries, not
just the United States are on a scale that no one can
truly fathom.
Barometer Of Fear
Instead of listening to analysts churn out the daily
talk of undervalued stocks and defensive positions, I
look at the stock market as a barometer of fear and for
the moment, investors are doing their best to subdue
their fears. But unless there is significant
improvement, particularly in US Housing and
Unemployment, than It is only going to take a small
spark to get investors "fired up" and into the selling
mode again.
Day Trading The Actual Spy Move Is Easier Than Trading The Directional Guess
I sold my spy puts on Friday as I believe that the SPY
is better traded by the day rather than my trying to
"Guess" when we will move lower. Today (April 18) I day
traded the market and earned about 23% return for the
day. If I had held my puts from when I bought them on
Wednesday last week, I would have made (if I sold at
$3.60) 42%. It sounds enormous, but dollar wise, I would
have made $1080 on my position from Wednesday versus
$932.00 which I made today. You can see the difference
is so negligible that it is better to trade when the
direction is clear, such as today.
And today was easier to
trade than when I made my call on Wednesday. It was
easier because the market was already over reacting to
the news from Europe and the US downgrade. The whole
idea of the SPY put hedge for me, is to build up a cash
cushion throughout the year. Last year that cash cushion
reached a point by year end that offered 15% protection
of my entire stock portfolio. That meant that my
portfolio could have fallen 15% and I would have been
able to break even for the year thanks to the SPY hedge.
I think that while it is
nice to look at charts and try to "gauge" what direction
the market may take, in the end the best money is made
when the market direction is clear. This morning it was
down and there was one additional bounce that was easy
to sell. After that the market recovered for the rest of
the day. It was an easy day to trade Spy Puts. Easier
than buying on a guess and waiting to see if I am right.
The Folly Of Defensive Stocks
I believe the market has for sometime been warning of
turmoil ahead and may in fact be unable to break through
resistance for a long time to come. The various analysts
who are calling this market undervalued in my opinion,
wrong. The market has now in general become fairly and
on many stocks fully valued. The very concept that an
investor can buy "defensive" stocks in case of a stock
pullback is, I believe folly. When stocks fall in this
market they will all fall. It doesn't matter if that
defensive stock instead of falling 40% falls 30%. In the
2000 - 2003 bear Johnson and Johnson fell 38% and in the
2007 to 2009 bear it fell 36%. It's easy to look back
now and think "I would have bought it at that level",
but ask yourself why so few did. Because of fear. If the
sovereign debt issues goes deeper, and it probably will,
then even defensive companies will see their earnings
tumble. When fear comes back into the market in a panic,
no one is buying, and you can tell because stocks are
collapsing.
I Believe In Naked Put Selling
I believe it is only through the selling of naked puts
and other option strategies that an investor can take
advantage of a market like this. I try to sell naked put
positions at strikes that I consider undervalued. If
there is no premium then I turn to other stocks or
simply wait. There are so many stocks that there is no
need to chase stocks higher. Through the constant
selling of naked puts and the consistent gains in income
on all the trades, I am increasing my capital so when
stocks do pull back and I am assigned, my actual cost
will be far lower than the strike I have sold. By also
having capital available at all times, I can then
take advantage of a panic and sell naked puts at much
higher premiums as happened in both of the last two bear
collapses. For example, when I sold naked puts on Coca
Cola starting in October 2008 at the $42 strike, I was
in the money within a few weeks of my first sell, I
bought and rolled out for enormous premiums as the panic
intensified. On one trade alone the puts netted more
than 5.00 in actual premium over their true worth. In
the end I was assigned on 500 shares and then sold calls
and more puts below $40.00. I have found that put
selling forces me to look long and hard at a stock to
determine its value not only to the market place but for
me as I must have a comfort level should I be assigned
and in a panic assignments often come fast and often.
The key is to stay with smaller positions, don't stray
beyond my comfort zone and don't be afraid of missing an
opportunity. It is the same strategy with my SPY puts. I
keep quantities small and if I believe I am wrong, I
sell and re-assess. By keeping positions small I
normally can keep losses small and I find rescue
strategies easier to implement on smaller quantities of
contracts than large ones.
SUMMARY - Skating On Thin Ice
The very fact that only a
handful of stocks have even managed to recover to their
2007 highs is a sure warning that it is best to walk
lightly and try not to break the thin ice we may all be
skating on. The
strategy of the cautious bull remains my strategy of
choice. It keeps my portfolio fairly liquid and allows
for unforeseen opportunities such as today, when I had
lots of capital to buy and sell spy puts. Sometimes I
prefer liquidity and less profit.