Bear Market Woes and Three Places to Hide… I Mean, Invest.

If you’re anything like me, you’re sick and tired of reading articles relating to the bear market. And rest assured, I’m growing sick of writing them.

Unfortunately, since fiction is not my forte, it’s my job to analyze the truth.

The bear facts – what distinguishes a market as a “bear”?

Short answer: A drop of 20% from a major index’s high.

And that’s just about what has happened so far. From the recent market high of 1565.15 on October 9, 2007, we have fallen between 17% and 22% depending on which day in the past two weeks you’re looking at. So let’s call it 20%.

Here’s the problem: the average investor, retrieving plenty of information from the internet (which there is nothing wrong with, provided it’s interpreted correctly), is under the mistaken impression that 20% means the market has reached a bottom.

Careful. 20% means it’s classified as a bear market. It doesn’t mean it’s over. If I tell you it’s Tuesday, you don’t automatically assume that it’s 11:59pm.

Let me give you some examples, and we will use the S&P 500 as our market indicator. The most recent bear market that we all remember began with the top on 3/23/2000, at a closing price of 1527.46. It passed the “20% drop” mark on 3/11/2001, at 1180.16… a difference of 347.30, translating to a drop of about 22.7%.

Did it go lower? Take a look:

Yes. It got murdered after that. It ended with a bottom on 10/09/2002 at a closing price of 776.76. That’s a drop off the high of 750.70 points, or about 49.1%.

Had you bought at the 20% drop line and held your investment, you were in for quite a ride.

Not enough? Here’s a chart of the S&P 500 going back to 1964, with four sets of highs and lows during bear market trends labeled for your convenience. Notice that in none of these cases did the pain end at a 20% loss.

So all we have to do is wait for a 30% or 40% drop, right? Sure, be my guest. I, however, am not comfortable purchasing any index at present levels, and maybe not for a while.

When can we detect a market bottom?

Here’s where things get depressing – it’s not as simple as investors taking profits or believing that corporations are overvalued. There are real problems with the economy of the United States.
At the risk of being a broken record, here’s a brief list:

-Oil is out of control, plain and simple. I know it pulled back off its high for a couple weeks, but it jumped almost $5 a barrel yesterday.

-Financials are still choking.

-Corporations are still downsizing. Nice word for “laying off workers”.

-Inflation is not just happening, it’s crippling. The CPI has increased 4% since the beginning of the year. It’s only July.

-Housing prices are plummeting (down about 16% year over year). Oh, and guess what happens when the fed raises interest rates to combat inflation? Say good night.

-The dollar is getting killed. Currency trends run long.

… and on and on…

Believe it or not, here’s the worst part: investor sentiment is still not pessimistic enough. People are still searching for places to buy. We haven’t hit bottom until there is some real, real pessimism.

What sign to we need before we undertake a broad-market buying spree? Nothing short of crying in the streets.

I want my stocks back: Where to invest in the meantime

During times like this, I look to individual stocks instead of the broad market in terms of investing. Not everything is falling like a rock – in fact, there are many stocks whose charts are devoid of any evidence of an economic downturn at all.

H. J. Heinz Company (HNZ) is one. Yes, ketchup. But Heinz sells a heck of a lot more than just ketchup, and more than 60% of its sales are outside the United States. What good is that?

It makes money, and most of the time it’s not in US dollars. Cha-ching. Plus, when consumers cut back spending during a recession, condiments are not a major source of savings.

Oh, and the stock is in a strong uptrend, recently hitting a new 52-week high. That’s bullish in anyone’s book.

Number two: The little green truck.

Hess (HES) does more than make those collectible metal toys, however. They are involved in the exploration, production, marketing and manufacturing of oil and natural gas.

I have said before that I don’t think oil is done it’s run, and since picking up an electric car on the way home from work is not a reality for most American (and worldwide) consumers, demand isn’t finished either. But that’s not what separates them from other energy companies.

The only Middle Eastern country Hess operates in is Egypt. Fairly tame considering the alternatives. The rest of Hess’s operations occur in Algeria, Australia, Azerbaijan, Brazil, Denmark, Equatorial Guinea, Gabon, Ghana, Indonesia, Norway, and several other countries the average person couldn’t find on a map. It’s diversified across the world, and mostly in places that don’t have a lot of turmoil.
As for the technical aspect, the stock has come off a recent high of $133.80 into strong support around the $95 area, including a helpful pop from beautiful earnings. If it doesn’t break below $90, it could start another strong upswing.

Finally, take a look at a healthcare fund. You know I’m in love with health care funds, especially internationally (as countries develop and prosper, healthcare improves rapidly), and I’ll continue that sentiment here.

However, not domestic healthcare… we’re on the brink of an election that cites healthcare as a major issue between candidates, and the market does not like uncertainty. However, Global Health Care iShares (IXJ), although partially invested in US companies, is diversified among many international health care companies as well. It has broken its recent downtrend from $62, and is in the beginning of a possible upswing. I like it anywhere from $52 to $54.

WisdomTree International Health Care Fund (DBR) would be a possible play as well, but the chart didn’t seem technically strong enough to convince me that it was a better option.

Enjoy the ride, wherever it takes us.

John K. Whitehall
Analyst, Bourbon & Bayonets