Issue 16 • March 18, 2009

Defending Your Wealth from a Bear with Nine Lives

The S&P 500 Index is now down over 50% from its peak in October 2007, before its recent pop to the upside over the past week.¹

It’s no wonder investors are asking if we’re headed for a “lost decade” — similar to what investors in Japan have experienced (for nearly TWO decades now). In fact, since 1989, Japan’s Nikkei is the modern-day definition of an on-going secular bear market.

I wouldn’t say we’re heading into one in the U.S. ... because we’ve already BEEN in a secular bear market since the tech bubble burst in 2000.

Recall, the S&P 500 Index made only a marginal new high in 2007 — just a few percentage points above its March 2000 peak — even after five long years of effort. It was a classic “double-top” in stocks. Now, fewer than two years later, the S&P 500 has once again been cut in HALF from its peak ... that is a secular bear market in action.²

During the 20th Century, there were three, long-term, secular bear markets in stocks. They occurred (roughly) between: 1906-1921, 1929-1942 (the granddaddy of them all) and 1966-1982.

There’s little doubt that we are in another one now, which began in 2000.³ The key questions on investors’ minds now are:

How low will stocks go?

How much longer will the bear market last?

And how can I protect my investments — and potentially profit from a secular bear market climate?

Bears with Nine Lives ...

Like a cat with nine lives, it’s not easy to kill off a secular bear market in stocks — the defining feature is: LONGEVITY. The three 20th Century secular bear markets lasted on average OVER 18 YEARS! To be sure, there were short, cyclical bull rallies in between — some with powerful upside moves. But profiting from them is EXTREMELY tricky.

After the Dow plunged 89% from 1929 to mid-1932, stocks went through some wild swings (including strong rallies) before rolling over again and losing another 60% between 1937 and 1942! All in all, there were 12 distinct bear markets from 1929 to 1942, with a like number of short-term bull swings in between.

But the entire period was one, long secular bear market, since the Dow didn’t surpass its 1929 high for good until 1954.⁴ Investors were forced to wait 25 long years just to break even. This is a history lesson NOT to be taken lightly.

Deflation is what plagues our markets today. But, during the secular bear market that began in the mid-1960s, it was inflation that made the situation worse. Like the current secular bear market since 2000, stocks also peaked in 1966 then made a “double-top” in 1968 at a higher level before falling sharply. The decade and one-half that followed was like a sickening roller-coaster ride to nowhere!

From 1968 to 1970, stocks dropped 36%, and then rallied briefly, until rolling over for another LOSS of 48% from 1973 to 1974. Then came another bear market bounce, followed by a final 27% selloff from 1980 to 1982. In other words, market conditions remained volatile for MANY years before stocks finally recovered for good after 1982. The end result: a punishing 16-YEAR secular bear market in equities.⁵

Extremes Led Us Into This Bear,
Expect More Extremes Before it’s Over

Another key feature of a secular bear market is that it begins at extremes and ends at extremes. The extremely overvalued Nasdaq bubble in 2000 was the first top in the current secular bear market cycle. The double-top was completed five years later, when the housing/credit bubble collapsed in 2007.

Before markets return to normal, it’s highly probable we will witness extremes in the opposite direction. That is ... extreme undervaluation, as in single-digit price-to-earnings (P/E) ratios. Don’t think this isn’t possible before this bear market finally bottoms.

Last week, the S&P 500 Index slipped once again to new bear market lows, the lowest level since 1996 to be exact ... 12-years worth of stock market gains LOST in just 18 months! But last Tuesday, stocks turned on a dime and rallied dramatically. In fact, the S&P 500 is up over 8% in just the past five trading days.⁶

So, is this the beginning of another potentially powerful counter-trend rally?

It’s still too early to tell, but as I said in last week’s Weiss Advice: After stocks got off to one of the worst years on record early in 2009, perhaps the time for a robust bear market rally has finally arrived.

If the S&P 500 does manage to extend this move, a strong, tradable rally may unfold similar to the cyclical bull market rally we saw in late 2008. Were you able to profit from it? If you did, then you’re no doubt a very nimble trader. That’s because, if you were away for just a few weeks during the holiday season — from Thanksgiving 2008 to New Year’s 2009 — you probably missed the entire rally.

Bear Market Rallies: Enjoy them While They Last ...

A common definition of a bull trend in stocks is a rally of 20% or more from a previous low. According to this definition, the S&P 500 Index enjoyed a short and sharp rally of 24%, which lasted from November 20, 2008 through January 6, 2009 ... a six-week long rally!⁷

But this “bull market” pop to the upside was nothing more than a “cyclical” bull market move WITHIN a prolonged “secular” BEAR market. It was a classic bear-market-bounce in every sense of the definition. We’re bound to see more — like the one underway right now. It’s quite common during secular bear markets, to see rebounds that are brief, and sometimes powerful. These “counter-trend” rallies happen frequently.

If you want to catch both trends — the decline and then the recovery — you really have to be on your toes to profit from these quick POPS. You need a trader’s mentality and you need good timing to take your money and run before the market DROPS again to new lows … as has been the case in this bear market. And make no mistake — we’re still locked in the grasp of a secular bear market.

Many individual investors, however, have a hard time navigating the extreme twists and turns of the market, especially in today’s volatile climate. Cashing in on these brief, but profitable up-trends (and down-trends) isn’t easy, unless you are closely watching the market’s gyrations on a daily basis. Most investors just don’t have the time (or inclination) to do so.

Paralysis of analysis can be the biggest problem. There’s a lot of noise in markets right now, which is usually the case during a crisis-filled secular bear market. Many investors are glued to the sidelines ... waiting to act and trying to filter the noise.

Acting too soon could cost you dearly should markets plunge further. Acting too late will cost you missed opportunity should markets rebound. And if you’re not VERY careful, you may get sucked in late to a rally ... just in time for the market to roll over and sell off again. This is just one of many “bear traps” you must be on guard against.

To Navigate this Bear Market, Have a Professional Guide by Your Side

Today’s market volatility is even HIGHER than it was during the 1930s, the worst secular bear market on record, so you could easily get whip-sawed on your own in this market.⁸

But that’s where the guidance of a professional investment adviser, such as Weiss Capital Management, can pay dividends.

During our 2009 Outlook Webinar: Crisis, Consequences & Opportunities, we offered NEW clients the opportunity to receive a no-charge portfolio evaluation. Since then, we’ve been busy digging through investor account statements ... reviewing each holding with a fine-toothed comb.

Sadly, we’re finding that many Wall Street firms have not prepared clients adequately for this secular bear market environment. Many advisors, brokers, and financial planners just don’t believe in hedging, for instance. They tell clients: “We don’t use hedges ... just sit tight ... the market always comes back.” Perhaps, as we’ve illustrated here today, “always” can be a very long time during a secular bear market.

The magnitude of the market’s decline may have taken many professionals by surprise, granted, but still it is quite obvious that at least SOME defensive actions are required. That’s especially true if we’re only half-way through this secular bear market today.

At Weiss Capital Management, we have taken a number of steps to help protect and defend our client’s wealth in this environment. On a firm-wide basis we currently hold well over 50% of client assets in CASH, waiting for better buying opportunities to emerge.⁹ Meanwhile, the mutual fund industry at the end of January, held only 5.8% of assets in cash.¹⁰ This means investors are fully exposed to nearly 95% of the downside risk in stocks. Also, several of our specialty investment strategies actively use market hedges — such as inverse mutual funds and ETFs — that seek to profit even in volatile and declining financial markets.

To shed more light on financial market conditions and the fate of the economy, we are gathering next Wednesday, in a special online Webinar titled: Phase II: Bear Market Update.  

As part of this exclusive event, we’ll provide more details about the actions we’re taking for our clients in this ongoing secular bear market. Additionally, you’ll learn more about our Weiss Bear Strategy, a professional investment program that’s specifically designed to go UP in this DOWN market.

I invite you to join us for this special presentation. You can reserve your space now by registering here.

Good investing,

Mike Burnick
Director of Research & Client Communications
Weiss Capital Management, Inc.

¹ Bloomberg data: 3/11/09
² Ibid.
³ Business Week: Finding Opportunities in a Bear Market, 12/2/08
⁴ Business Week: Stock Markets: When Will the Bull Return?, 3/5/09;
  Bespoke Investment Group: Historical Bull and Bear Markets for the Dow: 1900-Present
⁵ Bespoke Investment Group: Back to the  “Bear”, 3/2/09
⁶ Bloomberg data: 3/17/09
⁷ Bespoke Investment Group: Back to the “Bear”, 3/2/09
⁸ Merrill Lynch: Market Analysis Comment, 3/9/09
⁹ “Weiss Capital Management Client Holdings Appraisal Report,” March 10, 2009
¹⁰ Investment Company Institute: Trends in Mutual Fund Investing January 2009, 2/26/09