MorningWord 3/25/14: There’s Always a Bear Market Somewhere – $GLD

by Dan March 25, 2014 10:02 am • Commentary

It’s a fact, stock markets go up over time.  Investors spend most of their time in what are commonly referred to as Bull Markets.  The latest Bull Market has lasted five years and has accounted for 150% gains from the lows in the S&P500.  Not bad at all. Wait another five years, and it is likely to be higher.

The flip side of the Bull is the dreaded Bear Market, defined by Investopedia:

A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20\% or more in multiple broad market indexes

For the most part though, a 20% decline from the peak is what most investors refer to as entering “Bear Market Territory”.  I have lived through two prolonged bear markets in U.S. equities, the first starting with the popping of the 90s Tech Bubble in March 2000 that lasted until the lows of October 2002. That bear market saw 50% peak to trough declines:

S&P 500 from Feb 2000 till Oct 2002 from Bloomberg

And then the much more violent 50% plus drop from all time highs in November 2007 to the lows in March 2009:

S&P500 from November 2007 to March 2009 from Bloomberg
S&P500 from November 2007 to March 2009 from Bloomberg

Why was the latter more violent? It all fell apart much quicker than the prior due to the fears of banking contagion. It felt like markets were in a free-fall.  The prior bear at the turn of the century had its fits and starts but it was more like prolonged torture. As if it was punishment for the IPO.

But regardless the duration, there is one eternal bear market rule for profitable trading: sell rallies.

Why am I bringing this up?  U.S. equities are still in a Bull Market and until proven otherwise, sell-offs should be bought. But to badly paraphrase friend of the site Jim Cramer, there’s always a bear market somewhere.

Last week on CNBC’s Fast Money we were discussing Gold and Tim Seymour made a very important point about the shiny metal, he stated “its in a bear market” and my immediate thought was that until something fundamentally changes for the asset or sentiment is just too poor, then it is a sale on any rally.

Since the highs in 2011, a period when global markets were still in crisis mode, GLD declined 38% from the peak to its recent trough at the end of 2013:

GLD 2011 to present from Bloomberg
GLD 2011 to present from Bloomberg

While Enis and Carter make a compelling case in this morning’s MacroWrap (here) for possible consolidation in Gold, with a possible breakout to new multi-month highs, I would be more inclined to stick to the bear market playbook and sell the rally and only buy for little moves higher rather than buy the breakout for a complete change of fortunes..