Securities Research Services

Tuesday, November 13, 2007

Bears Taking Over?

Jesse Livermore wrote:

"The average man doesn't wish to be told that it is a bull or a bear market. What he desires is to be told that specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn't even wish to have to think."


This may be true, but today we are going to take a look at the possibility we are moving into a bear market nonetheless.

Over the past few years it has been safe to buy the dips after sell offs like we experienced last week. There are a couple of important warning signs that this time around may be different.

First, the Russell 2000 index has made a lower high and is threatening to break its multi year up trend and make a lower low:



Next, the Dow Transports have already broken down:



We are not in a primary bear market yet and it is important to not anticipate that we will enter one by making big bets to that effect. It is, however, a good idea to be aware of the possibility that "the trends they may be a changin' "

What would a bear market mean?

For investors bear markets are, well, a real bear. They erode equity in the buy and hold accounts in a big way.

Traders on the other hand should not fear the bear, but embrace the bear. Bear markets tend to be much more volatile allowing for big tradable bounces and quick spikes lower. If the bear market is not struggled against, it can add more profit to the trader's portfolio than a weak bull market like the one we have been in for several years now.

We'll end with another Livermore gem:

" in a major bear market it is safer to sell when the market is down 50 points from the top, than when it is down just 10. The reason is, at down 50, all support is gone, and those who bought the breaks have lost all hope, are demoralized, and in a leveraged market are at the point where they all must try to exit the same small door at the same time."

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