Denial is a popular defensive mechanism for many investors.
Prices are falling. Yet many investors deny it’s a bear market. Or they deny caring about market declines.
Spotting investors in denial is easy. They say things like: “I’m in it for the long run.”
Or: “It’s only a paper loss.”
Or: “Stocks always come back.”
Denial is OK sometimes. After all, you might get back to even in five years or so. That’s not a lot of time in the long run.
But if you plan to retire in the next 10 years, denial can change your life.
A Downside Target for This Bear Market
A bear market can delay retirement plans. It can even lower your income for life.
The consequences are so dire, it’s worth considering a downside target for this bear market. The chart below shows a 40% decline is likely.
Markets never move in a straight line. After moving up, a down move follows.
Analysts call that down move a retracement because it retraces part of the advance. Prices often retrace half of the previous move.
The chart above shows the entire bull market in the S&P 500 Index. The low was 666 in 2009, and the high was 2,941 in 2018. That’s 2,275 points.
A 50% retracement means prices will drop about 1,140 points. Subtracting that from 2,941 gives a target of about 1,800 for the S&P 500.
Analysts also look at price patterns. The blue box in the chart shows the top pattern. It begins at the most recent consolidation.
Stocks moved sideways before the election in 2016. Then prices shot higher. From about 2,370 in 2016 to the recent high, that move covered about 570 points.
After the pattern forms, analysts expect a price move equal in size to the pattern. That also provides a target of 1,800.
Bad News for Investors
So two different techniques provide the same target. That’s bad news for investors. The target says the bear market will deliver losses of about 40%.
Economic news also targets a 40% decline in the S&P 500. Bear markets associated with recessions lose an average of 40%.
Several indicators point to a recession in 2019.
Federal Reserve policy is raising interest rates to slow the economy. But the Fed always goes too far. Eventually, higher rates cause a recession.
Indicators showing when rates are too high gave signals in December 2017. That forecasts a recession in the first half of 2019.
Stock prices usually turn down before a recession. On average, stocks start falling six to nine months before the recession starts.
This bear market began in October, right on schedule.
In 2019, watch for economists to start talking about a recession. Their official announcement of that recession will come in 2020. By then, stock prices should be heading higher.
Waiting for the news will destroy your wealth and possibly your retirement. We are probably halfway through the bear market. That means there’s still time to protect capital.
In 2019, ignore the news of recovery. Ignore the bulls.
Act to preserve your wealth. Or consider growing your wealth with put options, which increase when prices fall.
There’s no need to fear the bear market if you’re prepared.
Michael Carr, CMT, CFTe
Editor, Peak Velocity Trader