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Bear Market Thoughts

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.



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.



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,

Posted in Portfolio Management | 8 Responses

ETF Closures and Splits

With recent volatility, many readers have wondered about two issues they’ve read about regarding leveraged funds: can they “blow up” entirely, and what would a reverse split do to account values? I’ll cover them in order.

Let’s define “blow up” as liquidate and stop trading. Many investors assume that because leveraged ETFs (LETFs) move at a multiple of market volatility, i.e. up and down 2x or 3x the daily moves of the index they track, an extreme down move could take them to zero and cause their closure.

In practice, price movement is not the most common cause of ETF closure.

The top reason fund companies close funds is a lack of investor interest leading to a tiny amount of assets under management, unprofitable to the issuer. When a fund becomes unprofitable in this manner, or fails to ever achieve profitability from its start date, the issuer may call it a day with that fund and start a different one with a more appealing angle.

When this happens, the shutdown procedure is an orderly one monitored by regulators. Shareholders receive notice in advance of the scheduled liquidation. Most investors sell their shares prior to the actual liquidation. Those who hold to the liquidation date receive the full value of their shares based on the fund’s final net asset value.

Notice that the key metric for the issuer when evaluating a fund is not its price performance but its profitability. A popular LETF, such as Nasdaq 100 3x (TQQQ), remains profitable to its issuer (ProShares) even during down cycles. This year, for instance, the price of TQQQ has declined 67.7% through yesterday’s close, as the Nasdaq 100 declined 27.9%, yet it still has $13B in assets and remains popular with a high trading volume. Yesterday, it traded 182 million shares. By comparison, the world’s largest ETF by assets, SPDR S&P 500 (SPY) with $371B, traded only 91 million shares.

If the price of an LETF declines excessively, its issuer could run a reverse split to boost the price to a higher level more comfortable for trading. Investors might shy away from a fund priced too low, such as less than $5. If TQQQ reached $5, ProShares could run a 1-for-10 split, for instance, to take the share price up to $50.

Investors have come to consider splits good news and reverse splits bad news because the former happen after a price has gone up excessively while the latter after it has gone down, but neither type of split affects account value. Market impact on the position remains the same both before and after a split of either type. A 10% move higher, for example, would still grow the position size by 10% regardless of share price.

For example, if an investor owned 5,000 shares of TQQQ at $5, their position value would be $25,000. If the fund split 1-for-10, they would own 500 shares at $50 for the same position size of $25,000. They would end up with 1 share for every 10 they previously owned, but each share would be worth 10 times more. No money is gained or lost in splits.

TQQQ’s most recent split was a 2-for-1 on January 13 this year. The previous night, its price went from $154.26 to $77.13 and it opened January 13 at the new price. Since then, despite some investors having characterized the split as a sign of higher gains to come, the fund’s price has declined 65.1% to $26.90. Just as that split was not a harbinger of good news, nor would a reverse split be a harbinger of bad news. It’s possible that after the share price increased in a reverse split, it would keep going higher on subsequent market movement.

We saw precisely this scenario with some ProShares inverse funds in January.

For example, ProShares reverse split its Nasdaq 100 -3x (SQQQ) fund by 1-for-5 on January 13, taking its price from $6.28 to $31.42. A bad omen for the fund? Not in this case. It closed yesterday at $59.34 for an 88.9% gain since the reverse split.

Concluding the two issues, then:

<> As long as an LETF remains popular with investors, it is unlikely to close down.

<> Splits and reverse splits do not affect the value of a shareholder’s investment. They are merely accounting maneuvers to maintain appealing trade prices through market fluctuation.

I hope this helps you proceed confidently through this volatile period.

Yours very truly,

Posted in Leverage, Portfolio Management, TQQQ | Comments closed

Another Doozy—and You Can Handle It

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:

The Kelly Letter performance chart in April 2020

And how little it looks just a couple years later:

The Kelly Letter performance chart in April 2022

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,

Posted in Portfolio Management | Comments closed

Interview With an American Who Evacuated Kyiv


Neil and Carol Frerichs have been Kelly Letter subscribers since 2008. When Russia invaded Ukraine, I learned that their son, Kurt, was in Kyiv at the time and then evacuated to Poland. To get Kurt’s perspective, I spoke with him on Wednesday, March 16, 2022. This is our conversation.

(0:40) Things are fine in Warsaw.

(1:25) Kurt was in Kyiv to teach English, and study Russian and Ukrainian.

(2:43) Eastern Ukrainians are also patriotic toward Ukraine. They don’t want to join Russia.

(7:23) Life before the invasion was normal. None of Kurt’s Ukrainian friends expected Russia to invade.

(10:38) Kurt did not make preparations to evacuate because people said Russia was just flexing its muscles; and even if it did attack, the fighting would stay in the east.

(12:35) It wasn’t hard to leave. He packed one bag and got on a bus to Poland, but the trip took 24 hours.

(13:45) Poland is packed with Ukrainians. In Warsaw, Kurt hears more Russian and Ukrainian than Polish.

(16:46) Polish people expect the war to drag on a long time, but Ukrainians are optimistic they’ll return home shortly.

(18:16) Many Ukrainians just want the violence to stop. They’ve been sick of it since 2014.

(19:10) Kurt is helping Ukrainians by translating phone calls to connect them to housing, transportation, and medical support.

(23:05) People in Poland are proud of the help they’re providing Ukrainians. It’s made them proud to be Polish.

(24:54) Kurt started a GoFundMe page to pay for his trips to the border to provide more help. It’s at https://gofund.me/aaa1fd8f

NOTE: After I stopped recording, Kurt told me that his Ukrainian friends in Russia say their Mastercards and Visas still work normally for domestic transactions, confirming a report in The Guardian.


Want more videos like this? Subscribe to The Kelly Letter YouTube channel.

Thank you for watching!

Posted in Geopolitics, Video | Comments closed

John Prather on Embracing Volatility

Kelly Letter Subscriber John Prather

John Prather subscribed to The Kelly Letter in 2008. That’s him pictured above.

He arrived with years of stock investing experience under his belt, and has been through several market cycles with the letter’s system. Here’s his background:

  • PhD in chemistry.
  • Worked for Ciba, DuPont, and Invista, a division of DuPont bought by Koch Industries.
  • Did a stint as a financial analyst for a “very large intermediates business that supplied monomers to the polyester world.”
  • Began investing in 1974, out of graduate school.
  • Inspired by President Nixon saying, “If I had money, I would put it in the stock market.”
  • First stock was National Semiconductor, now the “Silicon Valley” division of Texas Instruments.
  • Made enough money in National Semi to relocate to Alabama for a better job.
  • That made a believer of him: “I never looked away from the markets as a potential source of income.”
  • Good money management enabled him to retire at 62 and focus on investing.

He navigated the slow ’70s, hyperinflation of the early ’80s, Black Monday on 10/19/87 (the Dow’s largest single-day percentage drop in history: -22.6%), the “storming late ’90s” when the Nasdaq rose 400%, the 2000 Dot Com bust when the Nasdaq fell 78% and Cisco Systems lost 86% of its stock value, the subprime mortgage crash of 2008, the 2018 tech wreck, the Covid crash of 2020, and now along with the rest of us he’s going through the current turbulence.

Over five decades of investing, he’s learned a lot about managing volatility and concluded that emotions are an investor’s top challenge:

“So how do you live through all this as an investor? Emotionally, it ain’t easy. Emotions are usually one of your worst enemies—and they usually don’t get the best of you ’til after it’s too late.”

He recommends that newcomers teach themselves in no uncertain terms that they cannot time the market:

“If you think you can call bottoms and tops, try an experiment that I have tried: hedging. When your emotions tell you it is time to sell, buy some S&P 500 -2x (SDS $43 +21% YTD). When you think the worst is over, sell the SDS, i.e. call the bottom. Don’t buy much. Just test yourself. Keep score. Do this for a year or two and prove to yourself, as I did, that you cannot reliably make any money at this game.”

As a scientist, John loves experiments. He tested himself trading e-minis on one-minute time frames. “Did not work.” He traded corn, cotton, and currency futures. “Did not work.”

What ended up working for him were “deliberate systems that run on a well-tested signal; Sig comes to mind. These systems help my emotions. I just follow them.”

He advises to keep expectations realistic. He bears in mind the Rolling Stones song, “You Can’t Always Get What You Want” and its follow-on lyric, “But if you try sometimes, well, you might find … you get what you need.” He writes:

“So figure out what you need and go for it. The market has returned an average annual 10% over a lot of years. So that might be a good expectation. Learn to live with it. If you do better, that’s gravy. And you can do better, but likely not 20% a year on average by calling tops and bottoms. Go for systems that you can follow and follow them. Jumping around hoping lightning strikes does not work.

Every Saturday, he makes a report for himself to see the state of his portfolio. The following shows how he tracks 9Sig:

John's 9% Signal Chart

Here’s his explanation:

“The graph above is weekly NAV since I started 9Sig. I use the NAV/unit system to smooth out the data. The three straight lines are centered by the least squares fit of the data. And the moving averages are in there, too. The green line is a trailing stop that I fit to the data.

“Why do I do this? It gives me a longer-term view.

“Like right now, we have broken through my trailing stop but I can see I am still making money, and the moving averages have not rolled over and we seem to be returning to the mean after a big run-up.

“So there are several good signs there to help my emotions. I will be looking to add new money when I see TQQQ hated and forgotten after all the sellers are gone and it begins a new uptrend, just like I did in 2020.

“I think by keeping a longer-term view it helps me deal with emotions. And guess what? This approach has led to a ~45% compound annual growth for me since inception until last Saturday. I call this plan my ‘Jekyll and Hyde’ account. Hate it when Mr. Hyde is running the show, but got to remember that most of the time it is Dr. Jekyll’s turn.”

He’s learned that “volatility can be your friend.” It’s what provides chances to grow your money:

“Learn all you can about how volatility is calculated and estimated and those estimates applied. Quite a few Nobel Prizes have been won for better ways to estimate the volatility of a varying time series (stock prices).

“Once you get a good understanding, you will see that volatility creates the opportunity to buy low and sell high. Without volatility you would just be buying bonds and holding to maturity or depending on dividends. Embrace volatility and make it work for you. Don’t run from it.

“I think Jason often asks for some volatility so he can get a bargain price. Worse that can happen is 30 Down, Stick Around and look what that did for us in late ’20 and ’21. It was a bonanza.”

True, I do write about our plans needing periodic downside. Heading into this very quarter I did so. All of our Sig growth plans were heavy on cash and we needed lower prices to draw in their buying power. We’re getting it, and the buying power is eager and ready to go.

John notes that the simple key to the Sig system is to buy low and sell high:

“It ALWAYS tries to buy low and sell high. But this does not mean that you get to keep all your winnings all the time. Nothing goes straight up. But over time, buying low and selling high is the right thing to do, and the Signal plan does it in a systematic way, just following the signal, no predicting.”

He’s a fan of Yogi Berra’s observation: “It’s tough to make predictions, especially about the future.”

Thank you, John, for taking time to share a lifetime of investing wisdom.

Everyone else: I hope it helps. Remember, if you’re having a tough time you can always email me.

With you all the way,

Posted in Interviews | Comments closed
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