Michael Sincere’s Long-Term Trader: The Dow and the S&P 500 are likely falling into a bear market but your portfolio doesn’t have to sink with them

The odds now are good that both the Dow Jones Industrial Average
DJIA,
-0.30%
and the Standard & Poor’s 500
SPX,
-0.57%
will follow the Nasdaq into a bear market. If the Dow slips below 29,561, it will technically be in a bear market (a 20% drop from its all-time intraday high of 36,952 on January 5, 2022). 

If the S&P 500 falls below 3,854, technically it would be in a bear market (down 20% from its all-time intraday high of 4,818 on January 4, 2022. 

Long way down

If the bear-market forecasting models are correct, there’s a long way to go before the U.S. markets hit bottom. Don’t be surprised if the S&P 500 sinks as low as 3,200. This is not a prediction — it’s an educated guess based on historical trends and technical analysis. 

I was schooled in bear markets by the late Mark D. Cook, who warned for years that the U.S. Federal Reserve-controlled U.S. market was obscenely overbought. Although early with his predictions, Cook’s advice was sound (read his final bear-market alarm in my December 4, 2021 MarketWatch column.

Cook looked for bear-market clues. First was the presence of failed rallies and second was evidence that buy-the-dip strategies failed. This is exactly what has happened to the Nasdaq. He also warned that prices are the last to fall in a bear market, which is what is happening now. 

Bear markets are bad for nearly everyone 

Most investors have never experienced the destructive nature of a bear market. This includes many money managers who’ve enjoyed a 13-year bull market, one of the longest in history. On the way up, making money is easy and fun, but on the way down keeping emotions under control and getting a good night’s sleep are difficult. As many are learning the hard way, successful stock-picking is tough work. 

Some people believe that professional traders such as Cook actually enjoy bear markets. In fact, they are difficult to manage for most people, including traders. First, in the middle of a vicious bear market you get unexpected “blow-your-socks-off” rallies that only last a day (Last week, for example, the Dow rallied by 1,000 points and then fell by even more the next day). These “one-day wonders” can decimate the accounts of short-sellers who don’t cover their positions in time. 

Perhaps the only ones who succeed during a lengthy bear market are traders who are excellent market timers. They use put options, hedging strategies, and short-selling strategies to make money, but it’s extremely challenging. Most investors who can’t take the pain of a market downtrend tend to move to cash. 

Buy and hold (but not forever) 

A vast majority of investors follow the buy-and-hold advice of market veterans including Peter Lynch, Warren Buffett and John Bogle. As long as you are willing to hold for the long term (more than five years but usually much longer), and not panic when markets move lower, in theory your portfolio should return to its old highs. So far, that has always been the case for the U.S. market. 

There are no guarantees, of course, because a lot depends on which stocks you own. Yet if you are properly diversified, then you can survive a bear market. Unfortunately, some stocks won’t survive, one of the reasons that it’s important to study both technical and fundamental analysis. Do your homework on stocks you own and don’t rely on tipsters or touts for trading decisions. 

Good news in a bad market 

I want to end on a positive note. Bear markets tend to be short (from a few months to a year). When the bear ends and most stocks stop falling, there will be amazing opportunities to buy securities at fantastic prices, especially for those who have cash. 

If you are an indexer using dollar-cost-averaging strategies, you will have bought a greater number of shares at lower and lower prices during the bear market. Your account will be well positioned to make a full recovery whenever the markets finally begin to rally. 

When the U.S. market was consistently rising, it seemed like most stocks would never go down. As the market keeps falling, it may seem like many stocks will never go up again. But bear markets do end. Someday. 

Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks.” His latest book, “How to Profit in the Stock Market” (McGraw Hill, 2022), explores bull -and bear market investing strategies. 

More: ‘The Fed always screws up’: This forecaster sees inflation peaking and U.S. stocks in a bear market by summer

Also read: 8 ways to protect your money if you think stocks are headed even lower