Bear Market Coming? Bear Market Here?
By Roger Nusbaum, AdvisorShares ETF Strategist
If your strategy involves taking defensive action around a breach of the 200 day moving average (DMA) you probably should have taken some action by now as the S&P 500 has been below that trend line for about a month.
The reason I believe in this indicator is that a breach signals a problem of some sort with demand for equities, maybe a serious problem that leads to a large decline or maybe an insignificant problem that resolves in a day or three but if the market is going to down a lot it will breach the 200 DMA fairly early but not at the top.
Another reason is that it is easily understood as an objective trigger point (there are plenty of valid objective trigger points, the 200 DMA is just one of them). Objectivity hopefully reduces the extent to which emotion plays a role in the thought process for taking defensive action.
At any moment in time there is always a bull case for equities and a bear case (I say this all the time) and right now the bear case is gaining more momentum. The SPX’ 200 DMA breach occurred in mid-August amidst a fast decline. Bear markets don’t usually with fast declines (the bottom after the 1987 crash was six weeks after the crash) but since that fast decline the market has kind of languished under the 200 DMA and along the way the slope of the 200 DMA went negative. The languishing and the negative slope are two reasons to not give the market the benefit of doubt and be a little more aggressive with defensive action taken.
I’ve been a little quicker to take defensive action this time around than some of the other breaches since the 2009 bottom but again bear markets play out over months giving plenty of time to reduce exposure. I started taking defensive action on August 19th which was a luckily timed first step and have done several other trades along the way such that I have been fading small rallies. That small rallies have been better to sell is another reason to not give the market the benefit of the doubt.
Obviously no one knows what the market will do, times like these magnify uncertainty and indecision. For anyone inclined to want to sidestep some portion of a bear market, doing so becomes a little easier with a process that is repeatable and the discipline to follow that process with full understanding that you won’t always be correct, there will be head fakes along the way.