Bear market investing

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4. How to spot the appearance of a bear market

No bell rings to announce the start of a bear market and bull markets often begin in similar muted fashion.

But the final phase of a bull market, which precedes the start of a bear market, is usually accompanied by a number of signals:

• An indiscriminate and exponential rise in prices
• The widespread belief that 'it's different this time'
• Widespread fear of 'missing out' on the next hot stock
• The abandonment of traditional methods of valuing shares
• High levels of trading volume and increased involvement of private investors
• Relatively high or increasing interest rates

Major phases of a bear market

Historically, major bear markets have also followed distinct patterns.

1. First phase
   There is a sharp initial fall that removes much of the 'froth' from the market.
2. Middle phase
   There is a strong rally in prices for several months, which may lull some investors into thinking that the bear market is over. The rallies can be dramatic, but have lower trading volume than the initial sell-offs. And the advances tend to be concentrated on a few selected stocks, not the whole market.
3. Third phase
   There is a long slow downward grind in prices, accompanied by low volume and periodic false dawns until the bear phase ends quietly as share valuations reach rock bottom. At this point, few investors from the earlier buoyant phase in the market are interested in anything other than the most conservative investments.

Once started, bear markets rarely finish without at least a 40% decline in prices from the previous bull market peak. Often it is substantially more than this, sometimes as much as 80% or 90%. The bottom of the early 1970's bear was 50% below the peak. The 1929-33 bear market saw the Dow Jones index fall to around an eighth of its 1929 peak.

The average length of bear markets is frequently said to be around 16 months, but this average includes short 'corrections' such as the 1987 'crash'. Major bear markets typically occur after a decade of rising share prices, and last for about four years.

1. A word on bears 2. What is a bear market? 3. Why do bear markets happen? 4. How to spot the appearance of a bear market 5. How bear markets end 6. Bear market investment options: timing the market 7. Bear market investment options: the asset classes 8. Stocks: blue chips vs small caps 9. Bonds 10. Property and gold 11. Cash 12. Stocks: general principles 13. Bear-proofing - low 'beta' stocks 14. Bear-proofing - high yield shares 15. Bear-proofing - sectors that historically do well in bear markets 16. Bear-proofing - sectors that historically do badly in bear markets 17. Bear-proofing - key ratios for selecting stocks 18. Bear-proofing - investing in stocks you know and can support 19. Bear-proofing - pound cost averaging 20. Recognising the revival - a check list 21. Conclusion

• The Bear Book
• Stan Weinstein's Secrets for Profiting in Bull and Bear Markets
• The Great Crash, 1929