Salient to Investors:

Miles Hoffman writes:

  • Expect at least a 20% move down, and a seasonally bearish Fall.
  • Bear markets have two phases, and can move down and up sharply. The first is where the leading sector of the prior bull market goes into a bear market, while other sectors hold up or perform well. Some sectors perform better in bull markets, others in bear markets. The second phase is capitulation where everything declines.
  • There are long-term secular bull and bear markets and shorter-term cyclical bull and bear markets. Secular bear markets are very volatile, but secular bull markets are usually less volatile and are mostly straight up. A cyclical bear market within a secular bull market, or correction, is not very volatile, excepting 1987.
  • Investors should study behavioral finance.
  • Long-term returns from buying high PE multiples are miniscule.
  • Keynes said that markets can remain irrational a lot longer than you and I can remain solvent.
  • The biggest cyclical bull market move up was in the 1930s bear market.
  • Almost everyone reading Seeking Alpha are not buy and hold investors.
  • Investors put twice as much emphasis on losses.
  • Making money in a bear market is difficult and emotionally draining. There were 9 moves of 20+% in the 1930s bear market that occurred in 27 months. It makes more sense to try to make money on the downside by using inverse ETFs, if you can handle the volatility. You can go short in an IRA with an inverse ETF.
  • The reason that in bear markets some sectors crash while others soar is because professional money managers have to be invested. Clients dislike paying a fee for being in cash. Cash levels are usually 5% or less – the most I have seen is 15%, which took as much explaining to clients as losing stocks.
  • Almost all professional money managers are closet indexers and keep their sector weighting fairly close to those of the S&P 500.
  • Staples, healthcare, and utilities are leading sectors going into a bear market because even in a poor economy, people have to eat and heat.
  • Recession depresses cyclical industry revenues and earnings and drives the stocks to low valuations.
  • The 2000 market top was the last “honest” top, a single sector led bull with a blow off top, driven by the internet and a booming economy.
  • The 2007 market top was a dishonest top, driven by many sectors, and created by a shady Fed which lowered interest rates and diverted the “2000 winnings” into the housing market.
  • The current bull market has no foundation, like the internet revolution, just rot. It was not led by China, which crashed hard to a bottom in 2009, then bounced for a year, before going sideways, violently, for 5 years.
  • The market’s moving averages are sending warnings.
  • The Dow Industrials moves though its lows is being confirmed by the Dow Transports.
  • Bond market traders are smarter than equity traders, so the ratio of junk bonds relative to higher grade corporates is a valuable indicator.
  • High beta stocks relative to low beta stocks is bearish.
  • Small cap to large cap is bearish.
  • The ratio of stocks above and below their moving averages is bearish.

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