Bear market investing

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5. How bear markets end

Stock markets are driven by fear and greed. Just as the top of a bull market is marked by a climate of greed and exuberance, so the bottom of a bear market is marked by a climate of fear and pessimism.

But this has to end sometime, and in the past there have been a number of key signals that have indicated the beginning of the end:

1. Indiscriminate selling after a long period of slowly declining prices
   This is sometimes called 'capitulation'. Investors dump stocks at any price and vow never to return to the market again.
2. A major potential corporate or political crisis, particularly if it has ramifications for more than one company or market
   The end of the 1972-1974 bear market, for instance, was marked by the bankruptcy of Burmah Oil in the UK.
3. Highly negative but irrational rumours about companies
   Towards the end of 1974, there were rumours that a major bank or insurance company was about to go into liquidation. The Bank of England even had to deny rumours that it was going to go bust and rumours swirled around BAT Industries, even though the company had all its operations overseas and had substantial reserves of cash.
4. Low stock market ratings
   It is common for solid blue chip stocks to be valued on single figure price earnings ratios at the bottom of a bear market.
5. Low real interest rates and the beginnings of a downtrend in bond prices
   Low real interest rates are a precondition for economic revival, but a reviving economy means that inflation may again begin to increase, which is bad for bonds. Because of this and the prospect that interest rates may eventually rise as the economy picks up, the start of bull markets in shares is usually signalled by an opposite reaction in the bond market.

Think of the markets as a pendulum. The pendulum swings from bull to bear, overshoots, and eventually swings back.

The pendulous nature of the stock market

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

• Survive and Profit in Ferocious Markets - the Bear Book
• Secrets For Profiting In Bull And Bear Markets
• The Great Crash, 1929