How do you tell (other than after the fact) that you are in a bull or a bear market?
First, for those who don't know, a bull market is one where stocks are going up -- the buyers outnumber the sellers. And a bear market is the opposite.
Here's how I look at it: we're in a Bull Market when the Dow Jones Industrial Average keeps making new highs. And we are in a Bear Market when it isn't doing that for long periods of time.
By my definition, we have been in a Bear Market since 2000 and we will stay in it until the Dow breaks out and stays above about 11,500.
The reason that I take this view is that if you are in a diversified mutual fund and in a Bull Market, you should be making a nice rate of return year by year. And if you are losing money or not making any in that diversified fund, you are in a Bear Market.
Let's take an example: The market peaked in 2000 at 11,500. Your diversifed fund lost 40% as the market slid to 7500. Today the market is at 11,000. Your mutual fund hasn't made a cent in 6 years. That's a Bear Market. (And we're still in it.)
Oh yeah, I know the mutual fund industry would like us to believe that we've been in a Bull Market for the last two years as the market went from 7500 to 11,000. But if you rode it down it sure didn't feel like a Bull Market. It felt like you were just getting back what you'd lost. The only people who felt like we were in a Bull Market are people who got out when the Dow was at 11,000 and then bought back in at the bottom.
So don't get excited about Bull Market talk unless the market is moving permanently above where it's been. Otherwise, this rise from the bottom is just the market repricing as earnings increase over the years.
Frankly, I have no idea what's going to happen to the market, so I don't really think in terms of a Bull or Bear Market. I think in terms of wonderful businesses at on sale prices, and buy them when they get there. If you try to figure out what kind of a market we're in, you'll miss the bargains.
Do the 4Ms. Watch the tools.
Now go play.
