News you can use in a bear market.
Investing in a down market can be tricky and sometimes daunting. However, if you are prepared and well informed about what to do in this market situation, you stand to profit significantly.
Stockhouse’s staff and columnists want to help prepare you. Every week, we will round up the articles that deal with investing in a bear market, and look at what SH members have to say.
On Tuesday, Donald W. Dony’s article The S&P 500: Offering investors attractive valuations or a bull trap? began by asking – as the S&P 500 drifts lower in 2008, and many analysts and portfolio managers say the index “has attractive valuations and are offering investors excellent profit opportunities” – whether the index really is cheap at its present levels or if the short-term rallies are a bull trap.
Dony went into detail about bull traps, and investigates the technical aspects of the S&P 500. His final advice was this: “Investment approach: History indicates that overvalued indexes in bear markets are especially susceptible to downward pressure and lower numbers. Investors may wish to limit any purchases of S&P 500 stocks until the index has at least drifted down to fair value…. Alternatively, investors can profit from the anticipated decline by purchasing bear ETFs on the S&P 500. The Short S&P 500 ProShares (AMEX: SH, Bullboard) provides upward movement when the S&P 500 falls.”
On Wednesday, Jennifer Yousfi told us how to outperform the market with spin-offs. She began with advice from Louis Basenese, editor of The Takeover Trader, “In general, spin offs let the markets more accurately value the operations separately. So it’s important to know the parent companies’ motivation. Are they divesting underperforming assets to revive the parent stock, or breaking out quickly growing operations being held back? In my experience, if you stick to spin-offs of the latter, you’ll be handsomely rewarded.”
Yousfi went on to say, “Spin-offs tend to outperform because investors often sell when they receive stock in a new company they never intended to own, keeping share prices low initially. Also, index fund managers sell off spin-off shares if the new company is not added to the original parent company’s index. Institutional fund managers will also sell spin-off shares due to lack of liquidity or dividend. At the same time, management’s performance will have a greater impact on the shares of the spin-off than it had on the parent company, often spurring greater efforts to innovate and succeed.”
Finally, Yousfi gave three examples of investor-friendly reasons for a spin-off:
· Streamlining or consolidating business operations
· Tying management performance more closely to the subsidiary’s performance
· Freeing a subsidiary that is being held back by the parent corporation’s regulatory environment or other factors
On Friday, Nancy Zambell of Financially Fit asked, Are bond funds right for you? She noted that “in the wake of the recent volatility in the stock markets around the world, many investors have asked me – is it time to turn to bonds?”
Zambell’s “first response is that all investors should have some fixed income in their portfolios. Beyond that – the total investment, exact allocation, and maturity – depends on your individual circumstances.” She then goes on to give an explanation of the industry and the available instruments.
To sum up, Zambell reminded us that “your personal circumstances should dictate the composition of your portfolio, and I never encourage investors to put all of their eggs in one basket – be it stocks or bonds – no matter how the markets or economy are faring. A wide array of assets scattered among different classes will provide a safety net as well as an opportunity to benefit handsomely when one of those classes is on the upswing.”
On the Stockhouse Bullboards, members provided their advice.
“I believe a short position in a single stock should be a very short-term play. As volatile as these markets have been, the volatility of a single stock will always have the potential to be much greater than an entire index,” wrote jabba1900 on the Horizons BetaPro S&P TSX 60 Bear Plus ETF (TSX: T.HXD, Bullboard) Bullboard.
jabba1900 went on to write, “When you short a single stock, you're on margin, and a sudden turnaround in the stock could multiply your losses exponentially.
“These index short-plays can be traded as short-term plays if you're only looking to scalp a few points here and there, but if you're a good trader, why are you wasting your time playing indexes? There's much better leverage elsewhere.
“Index short-plays work much better as a hedge in uncertain times, and as a play on larger currents in the economy.”
Also on the HXD Bullboard, longnotshort said this is “the strangest bear market [around]...this almost seems like a correction in a bull market... some of the stocks I look at [have] average to below average volume days...and this leads me to believe this rally is more of an April thing...”
