January 2009

When will the bear market end?
By Phil Couture, CFP®
President, Couture Financial

In the traditional Chinese calendar, the U.S. has now entered the year of the ox. But on Wall Street it looks like 2009 will be another year of the bear.

While investors are hoping that the new presidential administration will be able to restore confidence in the financial markets, it will take time to reverse the current economic downturn. That means the stock market is likely to languish for another year with bears far outnumbering the bulls.

In analyzing today’s market, it’s important to look at the historical comparisons – not with the Great Depression of the 1930s but with more recent downturns. For instance, the last bear market occurred in 2000-03. There was a steep drop after the 9/11 terrorist attacks when the S&P 500 hit a low point of 944. However, the S&P remained in bear territory, falling to 775 in both July and October 2002. Not until April 2003 – 18 months after 9/11 – did the market break out of this bottoming trading range.

Therefore, even if the “crash” of October 2008 was the true bottom of the current bear market, it may take another 12 to 15 months for a new upward climb to begin. And that potential upturn could be delayed by any number of factors from another international crisis to a sudden jump in the price of oil or a further tightening of the global credit marketplace.

During this time of uncertainty, investors can use a number of tools to track and analyze market trends, including individual stock charts, price/earning (PE) ratios and indexes such as the S&P 500. Our firm pays close attention to indicators like the 200-day exponential moving average, which shows upward or downward market trends, with greater weight given to more recent data.

Another indicator is the Chicago Board of Options Exchange volatility index (VIX). Generally, the index goes up when the market becomes more volatile and therefore more unpredictable. When that occurs – as in late 2008 – investors can shift assets out of the stock market to reduce the risk of a loss and sleep better at
night.

While the market is likely to muddle along at a relatively low trading range for the coming months, there will continue to be opportunities for investors with a short-term focus. Share prices may change suddenly in response to factors like earnings reports, mergers and acquisitions and even bankruptcies by market competitors. That means investors can take advantage of both up- and downside movements based on an overall strategy of getting in and out of the market quickly.

In the meantime, keeping a high percentage of assets in cash remains
a prudent approach to investing. But keep watching the market indicators and the impact of economic stimulus measures so you can move quickly when the bulls start running again on Wall Street.

Phil Couture is president and founder of Couture Financial, Inc., Sarasota, holds the professional designation of Certified Financial Planner (CFP®). Since founding the firm in 1977, Couture has helped thousands of clients achieve their individual investment objectives with minimum risk.