Bull or bear?
Those tend to be our choices, right?
Either we’re in a bull market – like we have been in for more than 12 years (a record, by the way)…
Or are we headed twoard a bear market – like the one we experienced right before crash of 2008.
We know the cycles…
The hard part is identifying when the bear is coming. There are indicators, for sure – but most people have no idea what to look for – which is why I’m going to go ahead and give you a crash course on what to look for when a bear is coming.
That way you’re not caught off guard when you start watching the market sink like a lead balloon…
And then wind up wanting to take a long walk of a short pier.
The best part?
There are THREE things that you can look for…
Do you know what they are?
If you’ve been in the markets for any length of time – you might know a couple of the things to look out for – but you may not know ALL of the warning signs…
But they might be on your mind, especially with the way the market has been acting over the past few months – and especially the last week in particular.
The sharp drops have many people on Wall Street wondering and worrying if there’s a bear market that’s out there gathering its strength before it decides to pounce.
However, how do we even KNOW that we’re dealing with a bear? Or just the grumblings of an indecisive market – and even more importantly – what do we do?
Now, there are a few ways to deal with a bear…
And now, we’re not talking about the black, brown, white and black and white four-legged animals that inhabit the forests and tundra of our world.
We’re talking a bear market – and there are a few ways that we both identify and deal with it once the beast attacks.
Obviously, you would deal with a bear market very differently than you would when dealing with a bull…
However, to survive, a simple shift in investment strategy can mean the difference between being swallowed – and thriving during a bear market.
Diversification, long-term plays and investing in sectors that do well in downturns – such as banking or utilities – have long been ways to survive a “bear attack”…
But knowing how to survive doesn’t help us if we don’t realize we’re dealing with a bear.
How do we differentiate between a dip, a drop or a full on bear market?
Well, I’ll give you three identifiers that can let us know if the recent drops that have happened recently were just those – temporary drops…
Or the bear announcing its arrival.
First, one of the things to look at is how the Federal Reserve is reacting to the markets.
One of the biggest reasons that markets tank – is because the Fed raises interest rates too high for investors’ liking. Higher rates make borrowing less attractive and really take a bite out of corporate earnings.
The Fed has kept rates at nearly zero for the past seven years but it recently hinted that it would begin raising rates by next summer.
However, that estimation was BEFORE Fed Chair Jerome Powell said that persisting inflation (at a whopping 6.2% in October) may nudge the central bank to act sooner and clamp down harder.
This is BAD sign number one.
Secondly, we have to look at valuation.
An overvalued market is one of the biggest traps for investors…
And we know whether or not a market is overvalued by examining the price to earning’s ration (or P/E) – and we’ve been redlining for a while now.
For example: the historical P/E average for the S&P is about 15 – and markets naturally like to revert back to their average…
Right now, the S&P’s P/E ratio is 26 – that’s WAY above its mean.
And finally, the last thing we want to look for is whether or not the yield curve is inverted or not.
What is the yield curve? This is where the interest rate for Treasury bill works from shorter being highest – and longest being lower. If the yield curve is inverted – that means that the LONGER term bills are HIGHER than the shorter term.
When investors sense a bear – they’ll start buying 10-year bonds up like hot cakes – which increases their price and lowers the yield…
Hence the “inverted” yield curve.
The yield curve has inverted before EVERY recession for the last 50 years – and has only been wrong ONCE. Right now, the gap between 2 and 10-year bonds is NARROWING – yet another sign that a bear is living in our proverbial woods.
These indicators tend to let us know that the bear is coming…
And by the direction of these three indicators – it’s easy to see why some investors see a bear on the horizon.
However, there’s no need to panic – especially if you’re a subscriber to GorillaTrades – as our system uses hard data that already takes a lot of these factors into account.
It’s why our trading system and stock recommendations are some of the most trusted on the internet – and we’d love to have you along for the ride.
However, we get that some people like to do their own thing – especially in the face of danger…
Just know we’re here for you when you need us.
Either way, keep your eye on these three indicators – they’ll let you know when the bear is here – or if he’s still lurking in the trees.
“The most important lesson an investor can learn is to be dispassionate when confronted by unexpected and unfavorable outcomes.” — Peter Bernstein