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The Most Important Signs Of A Bear Market

All of the last bearish market had the same preliminary signs. Here are the most important signs of a bear market you have to detect on time

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After hitting record after record, should we afraid the bears are coming?

A lot of Wall Street veterans say “bullish” markets won’t die from growing old. However, after almost an entire decade of these bullish markets and rising trends, we may need to consider the idea of a peak, and then perhaps a “bearish”, down-falling market.

A bull can’t go on for eternity. “What goes up must come down”, and after the thrills and excitement of these bulls, the bears come in inevitably. Take, for example, the Standard and Poor’s 500 stock index: since the 1930’s, twelve ups were followed by downs (these were downturns of 20% or more).

Even so, the average bear market is about 40%. If more evidence for this is needed, we can look at the 2007-2009 riddle in which the S&P 500 considerably dropped down 57%, as well as the almost 50% landslide post-internet stock bubble exploded in 2000.

Is the term “bearish” even useful here? Or do we need another one to describe these plunging markets?

7 Ways To Detect The End Of A Bullish Market

We are actually living in the second-largest bull run, which is impressive because it has produced a fourth-best gain of nearly 254%. However, the bulls have to tire out at some point. Then, like waves in the ocean, it will reach its’ highest level, the peak, and start to crash like all of the bulls before it.

So whether you are a solid investor that prefer blue-chip stocks, semi trader investor who deals mainly with penny stocks trading or an adventurous investor deals with alternative investments such as Fintech and even a bitcoin – in all cases you should have detected the bullish signs beforehand and make the necessary adjustments.

To prepare for these “doomsday” predictions, we need to know what they are. Here are seven notable clues to look out for:

1. Extreme Optimism

Unfortunately, it seems when people get “happier” about the market, the better the chances of it crashing. This is a great example of the metaphor previously stated: “what goes up, must come down”.

How can you tell when investors and others are very optimistic?

The News – Recently on Barron’s, a headline read “Next Stop: Dow 30,000”, which shows a great amount of hope in the market.

Expected IPOs – Be sure to look out for IPOs like Snap, which had a 44% hop due to its’ debut. These investors are measured by what is called a “fear gauge” which is nicknamed “Vix”. The Vix is flirting very closely to its’ all-time low, which means the level of scared investors is quickly lowering.

Escalating Consumer Confidence – The Conference Board ran a survey in February wanting to know the confidence level of investors. The results? They received the highest measurement in almost 15 years! Also, the Industrial Averages for Dow Jones shows us an example of this with 12 record highs, and more chasing after it!

Rising stock valuations are another red flag – The average, in history, of trading the market is well below what we are trading at. In fact, we are trading at nearly double what we were in March of 2009, which is about 20x the earnings.

In stocks, it is extremely hard to think for your own and now “buy-in” to the hype of these bulls. Think on your own. It takes a complete change of mind, but it pays off in the long run. Don’t try to base your knowledge off of trend emails or what “everybody else is doing”.

2. Companies Filing Initial Public Offerings (IPOs)

When investors are afraid to buy at the lows of a downtrend, companies who sell IPOs will nearly fall to their knees for the buyers to get the word out about what they have. Often times, they do this by displaying they have strong signals, and also offer larger portions of the company.

In 2002 and 2009, the percentage of idle companies that went public was less than 2%. At the near peak of these bull markets, there are a lot of companies who invited other investors to partake in the fruit and invest in the risk, handing over the small parts of the company, but they were still documenting weak financials.

The environment around us has set a standard for unprofitable companies selling IPOs. In the 2000s, the percentage of public companies doing IPOs was at around 80%, according to a CNN Money story. In 2012, the percentage of companies not making any money was at 46%. Also, in 2014, the percentage was at 71% for unprofitable companies doing IPOs. This should send a pretty big red flag that a bear market could be approaching rapidly.

3. When Borrowing Costs Are Distinctly Different

This bull is almost an entire decade old and has been fed 0% interest rates for around the same time. Why is this strange? Because the Federal Reserve has hiked up to 2% during the last year. The Chair of the Board of Governors of the Federal Reserve System, Jerome Powell, has warned us there are at least two-three more upgrades this year. Even more, the next bump could be as early as the Federal Reserve’s meeting next week!

The New Debt Crisis?

The Federal Reserve used to really “shoot the bulls in the foot” when they hiked the rates too fast and too destructive than what we were expecting. These high rates impede the overall economy and impedes the profitability of the prices of stock. These high rates, and continuously getting higher rates, make it astronomically more difficult for the borrowers to keep track of their debts, which makes incisions on the consumer spending and cripple the well-being of businesses with high debt loans.

 4. The Engagement Of Mutual Fund Managers

When these managers pledge to the ultra-bullishness, they will leave a minimal amount of money in their portfolios because there is nothing significant in buying. Vice-Versa, the ultra-bearishness causes them to up the money amount to cushion the ongoing decline, so they can buy at the cheapest amounts, but most of them get to this level post-strongest trends, so they become the driving force for what happens next (with all of the other guidelines, too)

For about a decade now, the currency for mutual funds “cash to asset” ratio has been just below 4%. The last time this has happened (out of the documentation going back to the 1960’s) is in 2007, and as we all know… that didn’t exactly go so well. Oddly enough, these 4% funding levels have gone from the end of 2009.

In addition, recent surveys tell us the current trend is one of the most consistently hopeful trends since going back more than 50 years. Only 21% of bearish advisors even appeared on the 200-week average. Still, in 2007, it was at 24%, and in the highs of 1987, it attained 23%.

5. The Risk Of Increased Recession

When looking at RBC Capital Markets data, 7 out of 8 of bulls were dismantled by economic reduction. These reductions can cause the consumer spending to go down, cause the unemployment rate to go up, and can also lead to small corporate gains.

When the data from the economy is crippled, even more, crippled than what we thought, this raises a good red flag for trouble. Also, when our economic growth is starting to slow down, you should take caution of this as well.

Need another warning?

When service segments or manufacturing start to go downhill, this should not be taken lightly. In 2016’s GDP, the third quarter was at 3.5%, and then in the fourth quarter, it was at 1.9%, where it will start in the first quarter of 2017. It's still not the black predictions of economic crisis as some experts convinced – but it can easily be called the next recession.

6. Consumer Confidence Dying

It’s a simple concept in economics that shopping and spending money causes economic growth. Holidays and special times of the year cause our country, state, county, cities, and even more detailed parts of your demographic to flourish.

How important is this?

We (Americans) shopping claim a 2/3 piece of the economic activity of the United States. If we spend less than this, it should absolutely ring a bell to be cautious. In 2008, for example, our Consumer Confidence Index hit a low, below 30, on the scale, but in February it was at 114.8. If you remember back to 2008, the economy wasn’t in full-health.

Don't forget:

You should also be cautious when sensitive stocks start to degrade after a profitable session, as this is a good sign buyers are getting scared. If you need examples of these stocks, just look at the stocks who are at their peak when everything is “good” like businesses that sell products not needed for survival, banks, and stocks that involve transportation in them.

7. Fewer Stocks Are The Leaders/A Mess of Stocks Drop

When a market is rising, and the force of that rise is a few stocks and getting smaller, this is a sign of bad times ahead. You can be sure to check that a lot of stocks are now hitting their new 52 week lows and that they are more consistently dropping than rising in price, as these are extremely good indicators. Usually, after these two happen, and the lows keep increasing while the prices keep dropping, this means the veteran investors are quickly exiting the market.

So should we sell now

According to these signs, we shouldn’t be drop-dead ready to sell, but after considering the fact that some of these signs have slightly started to happen causes the need of selling to be in our minds. Alternatively, we can look for defensive stocks for investment.

This bull has been running for a long time and keeps going. This should make us all cautious for the tired bull to end.