Bestselling Financial Author

The S&P 500 is now in official bear market territory.

This is hard on stock investors, even veterans, even ones like us who follow a systematic program. If you’re feeling queasy, you’re not alone.

Sometimes it helps to go through common worries that fellow investors report, to see for yourself that you’re not alone. The following are thoughts I recently received from subscribers:

• I knew this was coming. I just knew it. Why didn’t I get out in January?
• I can’t believe I did this to my family. What will become of them now that we’ve lost so much?
• What if the market fails to recover before it’s time for my financial goal? I need to send somebody to college, or build a home, or retire, etc.
• We should hedge. If only we’d bought a -2x fund in January instead of continuing these plans.
• The quarterly price signals are obviously inaccurate. The signals should be generated by moving averages, or sentiment, or something else.

Some of this might ring familiar.

You know how I know? Because I’ve been at this a long time, in public, and I receive people’s thoughts through all market phases. Everything you read above I received in similar form in past down cycles. In every recovery that followed, I received frustration from people who failed to buy or hold during the bargain phase. As with market levels, emotions follow a cycle.

If you’re feeling bad about the bear market, you’re normal. If your mind tricks you into thinking you knew this one was coming, you’re normal. If you’re rational enough to overcome your gut feelings and stick with what’s proven, you’re unusual. I’m betting on the latter.

Courage is not the absence of fear, it’s doing what needs to be done despite the crushing sensation of fear.

___________________________________

REPLIES TO SUBSCRIBERS

The following is a collection of edited replies to subscribers, which I thought you would like to see as well.

———

This bear market is the real deal, and it’s hard on a lot of people, especially after years of excellent gains. The feeling that it’s all draining away is a rough one.

The good news is that it’s not all draining away. It will come back. We’re going to be able to buy on the cheap in our July signal, and I do think that inflation is stabilizing and will taper over the rest of the year. We will one day look back on these cheap prices with envy. The level of opportunity is not always this high, as we know.

As for hedging in the plans, my backtesting shows that in most time frames it reduces performance. It’s hard to believe this when looking back over six months in which it would have helped, but it’s true. If instead of just selling at sell signals, the plans hedged, it would degrade performance because the market usually rises and holding something that declines during that rise harms performance.

———

Yes, it does feel good to buy into weak prices. I’m a fan of any rational action that soothes emotion. I hope the Twinvest idea is a help to you as well, if not by the letter at least in spirit: buy more as the price goes down, less as it rises.

I agree with you that a more aggressive Fed would bring a silver lining in that people couldn’t say it’s being soft on inflation, and maybe more aggression would speed up this inflation-slaying project.

Your comment about preferring the market on its way back up made me smile. Right! I hear you, and I know we all want that at some point, and I’ll grant that sooner would be better than later. Maybe it will happen, my friend. When it does, you’ll be better positioned than most, thanks to maintaining the right mindset.

———

I do not believe that anybody knew that the market was heading into this crash back in January. Of course half of the commentators said so—there’s always half saying so. Stopped clocks being coincidentally right don’t count.

If you track your own feelings about the market systematically, grading each one, you are likely to find that you’re wrong half the time. It’s the track record of the most seasoned pros. Almost nobody escapes it over long periods honestly tracked.

Consider your circuit breaker idea.

Where would you set the stop loss? Have the plans go entirely to cash at what level of decline for the stock fund? If -10%, then you would be going to cash nearly every quarter in the leveraged plans. So, then, -20%? Now, you’re going to go to cash at a significant loss.

In these and other cases, how do you determine when to get back in? If you’re like most chartists, it would be when the market has already headed substantially higher and built upward momentum, which they claim to be able to “clearly see” on charts. If so, however, you will have locked in the circuit breaker losses. Repeating a process of locking in losses is no way to win at this.

Plot this out and you’ll find that such a plan would greatly trail the market over time, and trail our plans by an even bigger margin.

The challenge when devising any long-term, rules-based stock investing system is keeping enough cash in the stock market to stand a chance against a 100% allocation to SPY. Anything that bails to cash at the first sign of downdraft is a goner. Anything that hedges is twice as far gone.

___________________________________

12 MONTHS TO ENJOY

Finally, something to cheer you up, you buyer and/or holder, you.

Today’s op-ed by Mark Hulbert at MarketWatch is titled:

Those who buy stocks the day the S&P 500 enters a bear market have made an average of 22.7% in 12 months

The headline says it all, but there’s more:

“If you were eager to buy stocks at the beginning of the year, when the S&P 500 was 20% higher, why aren’t you even more eager now? … So long as you believe that the stock market will eventually go back up and surpass its January highs, however, purchases made now will show a bigger profit, and sooner, than the market itself.”

Yes, we believe this and so do our automated plans.

They believe it so thoroughly, in fact—if following rules based on historical truths can even be called a belief—that they react to lower prices with an automatic purchase.

The market rises twice as often as it falls, through any and all news. Now that it’s been falling for a while, it’s closer to its next rising phase. We can’t know when it will come, just that it will come, and that’s enough.

As always, I’m available by email with a simple reply, and the subscriber site is lively with discussion.

Have a good day!

Yours very truly,

It was another doozy of a day on Wall Street, and don’t you know it.

Everything crashed today:

-2.4% Dow
-4.0% Nasdaq
-3.9% Nasdaq 100
-2.8% S&P 500
-2.9% S&P 400
-3.0% S&P 600

A long downward grind can weigh on even the most stalwart investors, even ones like us who follow rigorous plans. In case you’re feeling the heat, I wanted to reach out tonight.

Stocks fell today for the same reasons they’ve been falling all year: high inflation, the Federal Reserve’s attempt to cool it, and Russia’s invasion of Ukraine. The latter is awful in its own right, but also contributes to inflation by keeping oil prices high.

On top of this base of anxiety, today added fear that China will lock down additional parts of its country, contributing to supply-chain woes which could sharpen inflation and dampen global economic growth.

Bad getting worse brings a positive aspect: lower sentiment, which is necessary for a base to form and a recovery to begin. We’re starting to see financial headlines in non-financial media, which is encouraging.

For example, this evening’s Drudge Report is headlined:

Wall Street Rattled
Dow -809
Tesla Wipes Out $114 Billion

And from the front page of The New York Times:

Stocks Drop 2.8%, Led Lower by Tech, as April’s Slump Continues

Fear is everywhere.

About 90% of S&P 500 stocks fell today. Money rushed to safe havens, such as Treasuries, pushing yields down. The 10-year now yields 2.77%, down from 2.90% on Friday. The CBOE Volatility Index (VIX) rose 24% to 33.5.

This is what down cycles look like. It’s not like we’ve never seen one before. They’re always this dark, and darker. Always the right move to have made was to buy or hold. Anybody who sold ended up regretting it.

Many analysts flagged big tech as oversold heading into earnings, hoping for a post-earnings pop for the headliners of the Nasdaq 100. That hasn’t prevented tech from selling off as hard as any other section of the stock market. When the collective gets nervous, risky stuff goes out the window and safe stuff comes in—precisely the opposite of what leads recoveries.

You can find somebody saying whatever you want here.

If you want to hear that a recession is unavoidable, that tech faces years of struggle, that Covid will never end, that inflation will persist, and that a nuclear war is likely, I can round up the names to say it.

If you want to hear that the US economy is strong enough to avoid recession, that big tech is fine given Microsoft’s double-digit growth forecast for its Azure cloud computing unit, that the pandemic is over and never was dangerous given low fatality rates and the types of people who died, that inflation has already peaked, and that Ukraine will prevail over Russia without nukes ever showing up, I can round up the names to say it.

But, really, do you need that?

After our time together, our level-headed look at market movement, you know that this how it always goes. And it all fits neatly under the heading Fluctuation. The market was up for a long time, it’s going down now, it will go up again—and longer than it went down. The correct way to manage this long-term rising line that wiggles is to react to its prices, as we do. They’re down now, leaving just two reasonable options: buy or hold.

This moment will one day blend into the long-term price line as a downward blip requiring a label reading “inflation, interest rates, Ukraine” to remind us that something happened there. Using our own recent history as a guide, notice how massive the Covid crash looked at the time:

And how little it looks just a couple years later:

If this much changes in just two years on our own chart, it’s easy to see why the forever charts of the general market absorb all events that seemed giant at the time.

As prices and sentiment drop, value builds. Progress is being made through the set of current problems, even if only by dint of time lapsed. No matter how this goes, we’re closer to recovery now than we were a month ago. Lost in the noise, earnings are going well. The S&P 500’s earnings in aggregate have beaten expectations by 7%. Eventually, this will matter.

I have no magic news for you today. No secret that I heard revealing why prices will turn higher any moment now. All I have is the history of our plans and my own belief that patience and discipline are likely to be rewarded again.

Well, that and this reminder: The turn will come out of nowhere. It will look like there’s no way things will ever get better. Then somehow they will, and we’ll be able to identify the beginning and end of the 2022 crash only in retrospect. That, too, is always how it goes.

The S&P 500 comes back as quickly as it went down. According to Global Financial Data, the average correction’s peak-to-trough drop in the S&P 500 since 1928 was 14.9% over 4.2 months, with average recoveries from the trough as follows:

S&P 500 Average Recoveries
from Correction Troughs
Since 1928 (%)
– – – – – – – – – – – – – – –
25.7  in 6 months
33.9  in 12 months
38.3  in 24 months

Now, they weren’t always straight up. Not all recoveries go the way the pandemic recovery went. Volatility is the name of this game, after all. The up and down rhythm never gives way to a straight line.

As for whether this is a correction or a bear market, my vote is the former.

Nothing going on is financially big enough to crush the bull market, and all of it is exhaustively covered in media. Nobody will be surprised by an inflation headline or interest-rate hike. This quick drop has all the markings of a correction. If stocks are part of your long-term financial plan, there’s no way to avoid them. There’s also no reason to. They’re useful, as our plans demonstrate.

So cheer up. We started the year hoping for lower prices, got them in our first-quarter buy signal, and still have additional buying power for future buy signals. You’ve been through cycles like this before and you can handle them. So can our plans.

I’m available by email with a simple reply, and the subscriber site is lively with discussion.

Have a restful night!

Yours very truly,