A Bearish Acting Market

What Does Bearish Mean? 

If you’re new to the world of the stock market and have no clue why we are talking about a bear, let’s catch you up to speed.

What is a bear market? It is when asset prices significantly decline, around 20% or more. This can create panic among investors and the country as a whole.

What is bearish? Having a bearish attitude means you are anticipating prices to go down. 

Despite every website, financial company, blogger, and Redditor claiming they know when a bear market is coming, there’s no perfect way to predict it. For example, COVID-19 caused a beark market and was totally unpredictable. Keep in mind that indicators are suggestions, not a golden rule. Don’t govern your choices by any one particular indicator or idea.

Common Indicators of a bear market:

  • Economic Growth Declines
  • High Market Volatility 
  • Falling Corporate Earnings 
  • High trade levels from institutional investors 
  • Negative Market Sentiment 

Historic Events that have caused Bearish Attitudes 

There are many current and past events that have caused Bearish attitudes or have preceded Bear Markets. Lets take a look at some:

  • Post Covid-19, the supply chain was a wreck. This led to inflation that got out of hand, in a way we haven’t seen in years. High inflation rates tend to create some panic, which leads to bearish attitudes.
  • Warren Buffet’s Activity: Buffet is a wildly successful investor. Following his investments can give us clues as to what he thinks the market is going to do. In the 2nd quarter of 2023, he sold $8 billion in stock, according to Yahoo Finance. You could use this as a substantial indicator that he was predicting a bear market.
  • Tempestuous Job Market: When we see unemployment rising, layoffs rising, and uncertainty in the market, we can take these as hints of a possible bear market.
  • The Hollywood strike of 2023: If workers are unhappy, it makes sense that we saw massive strikes. With both actors and writers on strike, the entertainment industry was negatively hit, potentially costing California more than $3 billion.
  • In June of 2008, a bear market was confirmed when the Dow Jones Industrial Average (DJIA) fell 20% from it’s high. If you were closely watching the DJIA and the market, you would have seen the market acting bearish and predicted the resulting bear market.

What You Should Do when you see this kind of behavior?

First off, it doesn’t mean the world is ending. The beauty of the stock market is all these adverse bearish events can occur, but a million other factors can counter them, saving us from a bear market.

Let’s say the worst happens: the economy crashes, and the country enters a recession. There is still an opportunity within a downturn. It’s not abnormal to have dips and lows. You just need to know what to do.

What’s the worst thing to do? The worst thing to do is panic and do nothing. Doing nothing won’t lead to a positive outcome. 

What should you do if the market crashes? Feel validated about any anxieties, but then get started changing your investment strategy. 

Here is the gist of several recommendations from Charles Schwab on a strategy shift during a bear market:

  1. Invest Cautiously: Don’t stop investing, but be sure not to put all your eggs in at once. Ensure you’re doing your due diligence to evaluate a company’s ability to withstand a recession. Still, don’t invest everything you’ve got, even if you think it can.
  2. Buy small and wide: It’s hard to predict a bear market and even harder to predict how long it will last. Instead of purchasing large amounts, start small but with consistency. You need to try to stick through the bearish downturn and set yourself up to see the benefits in the next bull market.
  3. Diversify Portfolio: In any economic period, you should ALWAYS diversify your portfolio. It can significantly help you when there is a downturn. Having a diverse set of stocks will assist in boosting the value of your portfolio in the next bull market. It’s all about the position. 

The important takeaway is not to panic about the present but to think ahead for the future. What position do you want to be in after a bear market is over?

Why Equities Lab?

Using a financial analysis tool is the best way to set yourself up correctly for a bearish market, especially when using personal research skills. With Equities Lab, you can use an existing strategy or create your own. You can decide the criteria and directly evaluate securities from the data.

With the ability to utilize existing screeners or create your own, there is an immense opportunity for success. During a bear market, you want to be more cautious. If you use Equities Lab, here are some examples of three screeners that analyze for low volatility. You can find them under “Featured Screeners” in the Explorer tab. 

  • Low Volatility with Good Returns: This screens for companies that DON’T have any significant movements in share price. It does this by backtesting for the absolute beta value lower than .8 and evaluating share prices that haven’t changed by 10% over twenty days at any point in the past six months. 
  • Utilities and Consumer Defense FTW: This spits out companies with market-like performance at half the volatility. It does this by backtesting in Utilities and Consumer Defense by excluding 70% of the lowest market cap and then excluding 70% of companies with the highest volatility within that. 
  • Supposedly Boring Dividend Screener: This sweeps for companies that pay high dividends and can continue those payments long-term. It does this by backtesting for companies that have paid dividends every year since they started paying dividends, the dividend/shares must be increasing yearly, the dividend yield has to be in the top 80% within a particular industry, it must be a large-cap company greater than $2 billion, the stock price has to make 10% less than 50% of the market, and the value score must be over 3

What now? Watch for indicators of a bear market, and when you see them, don’t panic! Adjust your strategy and remember to diversify. Look ahead to where you want to be when the market turns to a bull market.