One Way to Tell if We Are in a Bear Market

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Bull markets usually go up the first four trading days of the month. After giving a strong negative signal in May, investors should be watching this indicator in the early days of June. A second negative signal would be a confirmation that a new bear market has begun.

Money tends to get reallocated at the beginning of the month. The behavior is more pronounced at the beginning of the quarter and most pronounced at the beginning of the year. In bull markets, much of this money gets allocated on the buy side for stocks. In bears markets, a higher percentage of investing money will go to safe haven assets. So in a bull market the first four trading days (not five as many sources claim) of the month tend to see a nice rise in stock prices. The first couple of days are almost always positive.

Even in strong bull markets, not every month has to have an up move in the beginning days. Every so many months, investors are likely to grow cautious and take some profits. The bulls should regain control for the next several months however before profits get high enough again so that investors want to take some money off the table. So far, the rally that began in March 2009 has managed to just hold together.

The first negative signal for the rally was given in July 2009 for the Dow Jones Industrial Average. The next month was positive though and then another negative signal was given in early September. This was followed by a number of months that when stocks were up in the first four days. Then February 2010 gave another negative signal. March and April were once again OK and then came May.  The flash crash happened on the fourth trading day of May and the market was already down before it occurred. May was an ugly month.

Four negative signals on the first four trading days of the month indicator are a lot in just over a year. It indicates a rally that has weak underpinnings (as does the falling volume on the Dow during most of the rally). We still have not as of yet seen negative signals two months in a row. Maybe we will by June 4th.  If we do, it would be strong evidence that a new bear market has begun.

Disclosure: None.

Daryl Montgomery Organizer,
New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Pay Attention to the First Four Trading Days of 2009

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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As of today, it looks the Dow will have had its third worst year since its creation in the late 1800s. Only 1931 (the record holder) and 1907 were worse. Both were depression years. There was no central bank in 1907 to prop the market up (J.P. Morgan himself organized the rescue and prevented a complete meltdown of the U.S. financial system) and while the Federal Reserve existed in 1931, it was engaging in restrictive monetary policies instead of the non-stop currency printing that it going on today. The years following 1907 and 1931 had very different outcomes. 1908 was one of the best years for U.S. stocks in the twentieth century, 1932 was closer to one of the worst (but stock prices were volatile to say the least).

So what should we expect for stock in 2009? We don't know yet, but we will be getting some hints in the next few days. Large pools of investing money get shifted at the beginning of the year. It is important to note where money is flowing out of and where it is flowing to. Don't just look at the market overall, but at cap size, industries and individual commodities such as gold, silver, oil and food. Note what is rallying and what is selling off in the first four trading days, especially the biggest moves. This will tell you what investments the money is going out of and going to.

Shifts in buying in certain market sectors don't mean a straight up move however. It is not uncommon for rallies in the first four days to have some pullback later in January and this can provide you with a buying opportunity. There is also no guarantee that the selling won't last longer than that also. You need to be particularly aware of this for commodities with seasonal patterns (such as oil and gas).

You are probably seeing in the mass media "expert" advice for investing in 2009. In general, you should ignore it and pay attention to the ultimate expert - the market itself. The market will soon be giving us some hints about where to find good investments. You should remember that there is always opportunity to make money in the markets and there are a lot of reasons to think that 2009 could be very promising in that regard.

NEXT: The Market Backdrop for 2009 - the Big Picture

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.