THE MOST IMPORTANT RULES OF A BEAR MARKET!

BY GARY KALTBAUM-DECEMBER 17, 2018

SAVE THIS FOR YOUR ARCHIVES!

We have not had to send out this updated email in a very long time. It may be time. Actually, it is time. Based on our rusty abacus, with still no major index hitting the 20% bear market threshold, approximately 70% of the stocks in our universe have. Many sectors and many countries have. After all, the RUSSELL 2000 is down over 19% from its highs. But don’t worry, it only includes 2,000 stocks. Currently, on top of the RUSSELL, the TRANSPORTS down 18%, the SOX down 19.6%, FINANCIALS (XLF) down 20.1%, the REGIONAL BANKS (KRE) down 26.5%, the NASDAQ down 15%, the NDX down 14.3%, but the S&P only down 11.6% and the DOW down a measly 10.5%. Over 1,200 stocks have hit new yearly lows with another 500-1,000 names very close.

First…we are not Cassandras. We are not perma-bears. Before October, we were bullish on half the market. We were bullish on growth and other areas in up-trends. Before October, we were bearish on areas like foreign markets, energy, commodities, housing and many other areas. It was not until the good 50% topped in early October did we say uh oh! Perma-bears are people who have been calling for crashes and depressions since our Bar Mitzvah. Of course, when the broken clock finally hits, they take credit for being right.

We are interpreters of the market, price first, then volume and then sentiment. We have done exhaustive studies going back 100+ years of market action. This involved many hours of study of both bull and bear markets. How do they top? How do they bottom? How do bull market rallies pull back? How do bear market rallies bounce? How do the masses react? From these studies, we have found characteristics that have shown up time and time again leading to our own set of rules based on these characteristics. You are now seeing all these rules played out in real time. It is these rules that have again, enabled us to stay in front and sidestep what is already some serious brutal action. In fact, this bearish action is playing out in almost classic fashion.

In no particular order:

In bull markets, surprises happen to the upside. In bear markets, surprises happen to the downside. Just this past week, JNJ loses $40 billion of market cap on some serious news but do you think it would have lost that much in a bull market?

In bull markets, stocks gap to the upside on great news. In bear markets, stocks are constantly blowing up on perceived good news. The latest being ADOBE and ULTA SALON. Blow ups simply don’t happen often in bull markets.

In bull markets, good news is great news and bad news is even good news. In bear markets, good news is bad news and bad news is horrid news.

In bull markets, overbought becomes more overbought. In bear markets, oversold becomes more oversold.

In bear markets, rallies are sharp, quick, make you feel good, get everyone bullish, suck you in…and then screw you soon after. (We coined those words!) We just had two very sharp and quick rallies up into resistance before failing miserably. (DOW 2100 points in 7 days and then DOW 1700 points in 6 days.)

In bull markets, margin expands as greed takes over. In bear markets, margin contracts as fear takes over.. Remember, margin (leverage) is a bull market’s best friend but biggest enemy in bear markets as leverage must come off first before the real selling starts. Margin debt is now contracting markedly down to a 1 year low.

In bear markets, the biggest losers will be the names that had the strongest runs during the bull market. Market players will not believe how low some of the most popular names drop. This occurs because their popularity makes them over-valued, over-loved and over-leveraged at the most inopportune time.

In bear markets, the average stock will lead the indices down. You are seeing it in plain sight right now…and is happening again over the past few days.

In bear markets, defensive areas will hold up best, at least for a while (Utilities, REITs, Consumer Staples and the like) Guess what is doing best now? This is because the big money is selling risk and has to park the money somewhere. They always choose the biggest, most liquid, boring low beta names. The only new yearly highs have come from these areas recently. On that note, in bear markets, the DOW holds up best because it is laden with the biggest,most liquid, boring low beta names. Notice how PFIZER, PROCTOR & GAMBLE, MERCK, and until Friday, JNJ have been or are at new yearly highs. Also, notice how even big technology names like CISCO and MICROSOFT have held up well. It is sell the higher beta tech to park the money in the bigger, lower beta tech.

Near the end of bull markets, quality heads south on IPOs. We read a study that in the past year, more than 75% of IPOs in the past year lost money. You do remember all those fabulous IPOs that came out in 99? We do!

In bear markets, the curtains come down on bubbles, on manias, on no sales BIOTECHS, on money losing companies and on ridiculously priced IPOs (SNAP) as bull markets are friendly to excessive speculation. Bear markets will crush excessive speculation. You are seeing it in real time in the coins as the average coin is down in the 90s with some going bye bye and now seeing it in the weed stocks….even though the defenders continue to swear by both. Bear markets make valuations matter.

In bear markets you will be hearing these words more often than CNN covers Trump…CHEAP, VALUE, UNDERVALUED, OVERDONE, IT’S THE ALGOS, ITS THE PROGRAMS, ITS THE COMPUTERS, FUNDAMENTALS ARE STILL STRONG, ECONOMY IS STILL STRONG and our two favorites: “THE MARKET IS WRONG.” We have news for those people who think the market is wrong. THE MARKET IS REALITY. And lastly, you will be hearing the word “CAPITULATION” more often than you will hear the name Kardashian! The problem with capitulation talk is simple. In bull markets, capitulation serves to halt pullbacks leading to more glorious legs up in the bull market. BUT…in bear markets, capitulation only serves to stanch the bleeding for a short time before sellers show up and blast the market again.

In bear market bottoms, the good news on why does not come out until months later. More timely, in bull market tops, the bad news on why also does not come out until months later. We hope you realize foreign markets topped out many months ago. We are now hearing of Germany and Japan contracting. We are now hearing worse numbers out of China. We started talking potential slowdowns here months ago. Our exact words were sales are now strong, earnings are now strong, the economy is now strong but markets look forwards, not backwards and we are worried about all the economically sensitive areas being crushed. Guess what everyone is talking about now? This morning’s front cover of the WSJ headline: “GLOBAL SLOWDOWN SPARKS WORRIES ABOUT U.S. STRENGTH.” Again, markets knew these headlines in advance. To make this case further, at the lows in 08-09, famous pundits were telling you to stay out of markets for another 5 years, “the financial system was collapsing,” people were taking cash out of banks…and on and on.

Towards the end of bull markets, no one believes a bear market is possible, especially after not having a real bear market since 09 because of the moronic, imbecilic dolts at the central banks around the globe who refused to let real price be discovered. (Do you think we like central banks?) As the bear winds its way, more and more pundits convert and more and more people come to the recognition. Price does move the brain matter. Of course, this will not be called a bear market right now because frankly, the 2 most popular indices are only in what they call “correction” territory but the average stock knows better. If this is not a bear market, we hate to see what a bear market looks like.

We do not have every answer. We just watch price as price is everything Opinion means nothing. We promise the market will do whatever it wants to do regardless of opinion. Hope and prayer will not matter. We have tried. It does not work. We have spent countless hours studying the greats like Oneill, Weinstein, Darvas and others which helped us come up with these rules. We never know how long bull markets or bear markets last but we believe we know what characteristics show up during both. We believe there is a good road map and have proved it again. As we have always told you, we just want to get the big picture correct.