We're in a Bear Market

Wow! A Bear Market! That means that we're going down 10-20% from here, right?

No. Not so much.

A Bear market is just a condition. It has meaning, but it doesn't mean that the condition won't change.

The Bear market condition does not preclude new highs in the future, nor does it guarantee new lows. Certainly, the odds of new lows are increased, as with any down trend, but this condition isn't very predictive of future price levels.

Furhtermore, remember that EVERY major Bull market starts in the midst of a Bear market condition. Every single one.

What this Bear market condition means to us is that we have to view the market differently and expect different things in different context. For instance, bad news is much more likely to have worse than expected impact on the market. Long positions need to be less excessive because bad surprises are more likely. Short sales can be given more time to work out for the same reason. Stops are more important too, because preservation of capital is key. Additionally, sell signals that might have been whipsaws in a Bull market can be shorted.

One day, the condition will change and then the Bull market rules will be in play. As we approach that time (and we may be right now), investors should be accumulating stocks. Buying quality is imperative, too, just in case we're early and the economy is worse than the market is discounting. One thing to remember about Bear markets is that they wear out the Bulls so that they aren't buying at the lowest risk and most rewarding time. If we follow the Bear market rules, we're much less likely to be worn out and much more psychologically able to exploit the opportunities that are placed before us.

Here's a couple to consider:

A basket of Telecoms--most of them are beaten up.
BMY--pays a big dividend while you wait
NRO -- quality commercial realestate at a discount paying a huge monthly dividend
CSCO -- a big name trading cheap with improving fundamentals
INTC -- the leader of the semi's acting like it's a junk stock.

These are just a few examples. They aren't recommendations, but they are indicative of the type of things investors ought to be looking at. The principles are fairly simple. Start with good, valuable franchises, household names, businesses that you know and know to be undervalued, look for assets at a discount, big and reasonably safe dividends, widely understood problems or better widely misunderstood problems. Avoid complex businesses that you can't understand or that don't make sense. Be very careful with highly leveraged companies. Financial companies need to be very carefully examined. Hard assets good--derivatives and goodwill bad. Avoid focusing in any one sector overmuch and avoid lower quality issues. If there is an unexpected bad problem, the lower quality stocks are most likely to go away entirely.

Bigger picture, we've got more than enough Bearishness built up to generate a heck of a rally, perhaps to new highs. As such, it probably pays to try to be as constructive as possible and continue to add holdings as the market turns up.