Bear Market on the Horizon? What are you doing?

21st Nov '17 by Albertos

21 comments 6795 reads

Most people seem to be factoring in at the very least a possibility of a correction into their investment strategies - and most think it's probable.

Like others I think this will start in the US and global markets will follow.

The US Q3 reporting season has given some backbone to the markets value there so potentially there is at least a few months breathing space.

I've adopted the strategy of moving gradually into more conservative high yielding stocks. The logic being that this creates a partial floor to potential downward movements if the dividend is comfortably covered by FCF and earnings ( and I guess if it gets too hairy I can sell out).

The other option is to transfer into cash - I note many comments saying they're approaching 50% cash or more. In fact I saw a Minervini post saying he was at 95% cash. (As an aside, is there any such thing as a "moat" given the rise of the US mega corporation - if they want it they'll park their tank on your lawn)

Just wondered if anyone else wanted to share their logic for what they are doing because I can't believe anyone is not concerned about the end of this bull run.

Phil

Unlock with Email

Unlock with Google

Already have an account?
Login here

Logic

22nd Nov '17

You may be interested in reading https://www.stockopedia.com/content/plans-for-an-eventual-bear-market-219508/ for some views on the matter.

JMLDutch

The fact that so many people are in cash seems sort of counter intuitive to expecting a bear market since apparently there is quite a lot of cash on the sidelines waiting for a buying opportunity.

Specific to the UK market, according to stockopedia, the median forecast P/E is 14.1 and the median yield is 3.24%. Hardly seems overvalued to me.

I agree that the USA market appears overvalued. However, that market could be distorted by the FANG(-like) stocks which make up an increasingly large portion there and trade at high valuations due to consistent high earnings growth (e.g. GOOG, MSFT, FB) and future potential (e.g. AMZN, NVDA, NFLX). According to vanguard, 24.5% of the S&P500 is information technology, a sector which generally trades on high valuations.

Rusty2

I'm hedging my bets, yes lots of talk about a market crash or correction but then so there was last year I remember some people selling everything and then missing out on the big rally since Brexit. They say more people lose money by not investing than by investing, it's probably true. If you invest, shares go up 30% and then market falls 20% you are still better off. The US market is up but most results are beating forecasts so I can see some justification. Minervini was out of market a few months ago then back in and now out, he does not trade like most on here, I reckon he does many trades a day, he is looking for a quick profit I have sold some, have more in cash now, problem is it's not earning anything, I have also been buying gold and done an index short on the FT250. The problem is we have Brexit to sort out, so it could just be a UK problem, end of the day we just don't know what will happen.

willhampson

I'm in large agreement with you Herbie! My personal view is that investors seem to be increasingly moving towards perceived attempts at timing the market, which seldom works - of course, that is their prerogative as it their assets after all! I'm about 10% in cash, mainly as I always like to have a buffer, but the rest is invested in internationally orientated growth companies (i.e. companies with limited domestic UK exposure). I actually think the U.S. bull run still has quite some legs in it. If of interest, Minervini was back in the market yesterday and seems to have changed tune to a more bullish outlook.

HumourMe

I'm a perma-bear so had to develop a system to get me into the market; with a value background I could almost always find a reason to not buy. Now, if shares meet my buy criteria that is what I (automatically) find myself having done at a new high/pivot point. If they meet my sell criteria then again a limit order is executed and I get an email. Currently I'm about 50% cash and tracking the allshare.

Buy stops require between 2 to 14% rise.
Sell stops require between 0.1 to 13% fall.

So for me, the answer to your question is, I'm trying to let the individual prices do the talking, because if I listened to my inner voice I would never speculate.

FREng

Please will you explain "buy stop" and "sell stop" and how you implement them?

Buy stop: A buy order is triggered if the bid prices rises above a predetermined level (and optionally the offer price is below a higher threshold).
Sell stop: A sell order is generated if the offer price falls below a predetermined level (and optionally the bid price is above a threshold). This can be combined with a trailing stop that rises as new highs are made.

They are triggered by the opposite side of the spread to protect against widening spreads triggering the order.
iDealing offer these conditional order types but these aren't common among other brokers. They also offer a trailing stop facility. I believe that spread betting companies may offer something similar.

Using share price alerts would also work, but requires paying attention to action them; I set the buy orders up on Saturday and review sell orders for existing positions. Buy orders trigger generally before 9am and when I get a chance at work I place the matching stop loss sell order set at a level to trigger on unexpected price falls.

Thanks, that's very helpful. My brokers have never offered trades with these names (or structure) so I'm unfamiliar with them.
[I did just buy some Boost Sp500 Vix Sh-Ter Fut 2.25x Lev Day (LON:VIXL) though, as a bear hedge].

matylda

Waiting for everyone to say they are Bullish and 100% invested - Then go short :)

Dennis Ayling

investors seem to be increasingly moving towards perceived attempts at timing the market, which seldom works

Agree, although trying to guess the top seems to be a natural thing to do to protect one's capital/profit, For most of us that is all it is - a guess and implies you think you are smarter than the market. I remember last year lots of people predicting a crash & piling into the SUK2 ETF, that would not have ended well.

Also, is it not ok & normal behaviour to feel anxious & uncomfortable climbing the 'wall of worry'.

Some people do shorts for protection, rather than selling a lot of their shares, believe Ed Croft and Robbie Burns do. Yes timing the market is difficult. Believe Minervini has closed his short now. The beauty of a short, it's so quick and easy to close or open or reduce, unlike selling say 20 or more shares, also you will have all the costs also.

lemonjar

25th Nov '17

There was a comment in Telegraph Money section this morning along the lines of that folk can end up losing more money trying to time and second guess corrections and thus miss out on extended bull runs, and that on balance you're better off taking the long view and riding any corrections out. That statement may well apply to someone who moved to cash earlier in the year and is now behind so to speak. Worse, you might be tempted back into shares to stop missing out only to jump in at the wrong time. (Or it was something to that effect anyway, think the comment was maybe from mark dampier but might have that wrong).

I guess its fundamentally hard to read the tea leaves, I think many of us are swayed by collective sentiment when it comes to macro economics. That all said, I don't know either and not that experienced, but it does feel like second guessing the market is potentially a road to longer term underperformance?

Mike888

26th Nov '17

I usually short the FTSE 100 when I'm nervous, I am now and have been for a while and did so at recent highs so I'm doing OK at the moment. In reality I see it as protection against a significant and surprising fall, it isn't to time the market it is an insurance policy if something really dreadful happens quickly. I've tried numerous techniques, options, CFD, spreadbet, I'm preferring the latter at the moment. The problem with each of these however is the cost of running them..

So an option I'm considering, which I haven't tried yet, but seems to make some sense, is to short poor stocks to a percentage of my long positions. My logic being that they should provide me profit if they continue to fall, and it there is a market downturn then logically they should follow the markets lead too, maybe even accelerate given their poor status to start with.

I've never heard of anyone doing this. unless anyone here has tried it or knows of some guru that does ?

cig

I don't know if I am the only one, but I am not concerned. The reasoning is:

- First I do not believe we are in a raging bull market: the most common bull views seem to come from a unit error: people look at nominal stock prices instead of the implied equity premium, which reflects the economic reality that investors can only choose investment classes relative to each other. The equity premium is close to historical averages.

- Second, we could be in a temporary rates-driven bubble, but I believe rates will stay low for at least the next decade or so, reflective of an imbalance between demand for savings and the supply, coming from developed world demographics and technology (which kills the store of value property of many things and processses). The most common belief on rates seems to be what we may call the Narcissistic Mean: absent a fact-based theory of rates (it's hard!) people seem to revert to using the average of their investing adult life as the "normal rate".

- Third, behaviourally the exhuberance of a bubble is not there in the equity markets. If you don't remember what it looks like from previous episodes, just go and look at the crypto currency world today, that's the real thing.

(Still not being concerned does not mean not being prepared, I'm happy to hold my portfolio at essentially any price between 0 and double current prices, so not worried about crashes.)

Every time this question pops up it inevitably ends up as a debate as to whether there is likely to be a correction or not, and then perspectives as to whether its possible to time the market. But that is not the question being asked.

Equally it very much depends upon the investment horizon of the individual as to whether they feel the need for protection, if you are less than 45 there is an argument that it is a pointless exercise, if you are in your late 50's the need for protection probably becomes more important. If you are retired and have no other means of building capital and this forms part of your income, your perspective on protection becomes probably even more important.

I think the question asked, is what techniques people use to protect themselves from market corrections.

Mike, I think in fairness the question being asked by the author is very much what investors are doing given that an apparent bear market is on the horizon - hence the title of the thread: "Bear Market on the Horizon? What are you doing?" So it's not really surprising that the discussion has gone down that route and people's perceptions as to the direction of the market.

The question you pose as to what we investors anticipate doing when an actual crash manifests is a different question, but still an interesting one. For me, I would have to see what the catalyst for the crash was before deciding (e.g. war with N. Korea, Trump impeachment, removal of QE - could be anything). I envisage certainly shorting an index as I do not fancy liquidating all my positions and incurring all the fees that come with that. But the truth is, I don't know yet what I would do.

I would short the FTSE250 or a smaller index if you can, they will fall more than the FTSE100, look at Brexit and other market falls. Smaller companies tend to fall more as less reserves and maybe more debt., also FTSE 100 companies are more international, so if it’s just a UK problem they will be less affected. I think Ed Croft was shorting low ranked US companies. If you are certain the market will crash then a spread bet short of £x per point maybe an idea, Robbie Burns does this and so have I, it’s very cheap, quick way of protecting your investments. If it’s a global problem then gold in a good investment.

Ramridge

Well put, Mike888.
I have been pondering over this for some months and considered shorts, cash, moving to other asset classes, and so on. Finally the method I have been following since around March is the following.

I use cash as my main control lever. So I am invested 100% in equities when the bull market is firmly established, moving to 100% cash when all indications are that a market correction or market crash is imminent. Currently I am 70% cash which reflects my sense of the potential market risk.

Secondly, I use the concept of exposed-to-risk. It means if I buy an equity, then I will be exposed to risk for only a few weeks/ months as opposed to month/ years depending on the market sentiment. I'll take a smaller profit now, rather than a potentially better gain later. To put it another way, more of a trading bend of mind than investing.

Finally the number of equity holdings shrink when the market sentiment turns south. In a bull market I would have from 8 to 12 shares in my portfolio. These come down to 4 - 6 in number as in current uncertain times. I considered moving to solid FTSE100, or FTSE250 shares with low volatility, but decided against it. The only concession I make is that the shares I hold are not illiquid.

jonesj

Currently
87.5% stocks (decreased from ~91%). Including Investment Trusts.
3.5% precious metals -up from zero.
9% Cash (~4% GBP, 4% SGD & remainder is various)

The stock percentage may be nudged down slightly very shortly.

There are a couple of problems with moving more to cash:
1 The GBP is not my preferred currency and has not been for several years (due to our national borrow & spend culture). However GBP is all I can hold in an ISA.
2 My capital gains allowance is mostly used, so selling anything outside the ISA generates a certain tax bill. Risk of loss v certain tax bill needs to be considered.

Any sales in the remainder of the tax year are most likely to be in the ISA or SIPP & the cash will remain in those accounts (of course).

iwright7

27th Nov '17

I have had a cracking year with small caps and am getting to a stage where wealth preservation is becoming increasingly important, so I have given myself the following target asset allocations by the end of December:

40% Cash
30% Strong Moat companies
15% Robotics/AI/Asia ETFs
7.5% High QM/Broker Upgrades
7.5% High Stockranks/Value

The 1st 3 groups will long term holds and the last 2 trading opportunities, to stop me getting bored! Ian

Bear Market on the Horizon? What are you doing?

Unlock the rest of this article with a 14 day trial

About the Author

Albertos

21 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...