Monday, March 31, 2008

The Bear Necessities !!!

Well I shouldn’t have posted Death Cross (ominous!!!…it is a prelude to more bearishness). And speaking of bearishness, I decided to spend some time reading a book on Bear Market. Three hours of serious reading!!!( u caught me..I confess…one hour was spent on serious reading ,the next two pretending that I was still seriously reading!!!). There is an old adage, which says that knowledge can be communicated but wisdom has to be self-taught (yeah! Yeah! I am tryin my hand at wisdom!).

So I get the wisdom and you get the knowledge communicated to you by this post. Ready… here it goes..

Lets see what Charles Dow had to say years ago:

‘‘It is a remarkable fact in speculation that both the average price of

a number of stocks and the price of individual stocks show strong

tendencies, both in rallies and relapses, to reach one half of all the

primary movement. When a stock falls ten points in a comparatively

direct move, it is extremely likely to rally as much as five points from

the lowest. It often rallies or relapses more than half of the original

swing, but it is generally safe to wait for about half.

‘‘A Comparison of the Averages . . . shows how regularly this

movement occurs. When a recovery does not come near being one

half of a decline, it generally means that the primary movement has

not been completed and that a new low quotation will be made.’’

And now lets see what Rhea says..Rhea who???. Robert Rhea, who was a hugely

successful investment advisor during the 1930s says :

‘‘Bear markets seem to be divided into three phases: the first being

the abandonment of hopes upon which the uprush of the preceding

bull market was predicated; the second being the reflection of the

decreased earning power and reduction of dividends; and the third

representing distress liquidation of securities which must be sold to

meet living expenses. Each of these phases seems to be divided by a

secondary reaction which is often erroneously assumed to be the

beginning of a bull market.’’

I some times wonder why these guys could not say anything in plain English…maybe they wanted a few educated to understand them….that way you have more ignorant in the market(conspiracy theory at work here I guess…the less the people understand the more money they will loose!!!) Anyways, Simply put, a Bear Market in stocks comes about because the prices get too high in relation to their value. This is caused by public enthusiasm that

gradually becomes excessive, appraising stocks out of proportion to their ‘‘true’’ earnings.

It is the nature of such things to go to extremes in both directions. So, as a bull market often goes too high, so too does a bear market go too low. The excesses are caused by human emotions.

So when does a Bear Market start???

Its simple…Bear Market starts when Bull Market ends!!!(told u the KISS element!!!).

But how does one know that the Bull Market is showing THE SIGNS!!! (of declining).

  • Investor sentiment is still bullish while the underlying economic structure continues to weaken.
  • Price earnings ratios…crazy valuations!!!. To return to a more traditional price earnings ratio,the market need to correct.
  • The Federal Reserve….. driving interest rates down… with no result, it is increasingly clear that when the economy goes south, there is little government can do to stop it.
  • Gold…. the interest in gold and gold shares picks up.
  • Stocks… At tops, there is what is commonly classified as ‘‘churning’’ (i.e., high volume but not much change in prices, or great irregularity in prices [some up sharply, some down sharply], plus a lot of volatility day to day).
  • Unanimity of bullish forecasts. Any downturn is dismissed as temporary.
  • Sharp rise in debt. Consumer debt, household debt service payments, losses by credit card issuers, bankruptcy filings and mortgage delinquencies all rise sharply.

And how does a Bear Market shows time for its hibernation???

  • Bad news abundant. And the market acts contrary to the obvious.
  • Stock Market. Volume tends to increase on rallies, decrease on dips.
  • Confidence. Nil. Pessimistic forecasts made for the market and for business.

Ahem!!! I guess that’s enuff for a brief note.And by the way all Bears are not Sinister some are cute too. Any lessons???Yesssss……If only I had researched for this when Nifty was riding 6000 I would have been a rich man!!!! But like I always say just tryin2trade!!!!

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