MarketTrend Advisors - Coping With Bear Markets 023009

Coping with Bear Markets

Don Lansing, Chief Investment Officer

2© 2009 MarketTrend Advisors, Ltd.

The S&P 500 Delivers a LOST Decade

>30% S&P 500 DECLINE over the past 10 years

Did your strategies protect you?

Active “tactical” asset allocation requires a reassessment of the market environment

Are stocks now cheap? Or is another shoe about to drop?


Secular Market Cycles

Market Moves in Broad Cycles lasting 15-20 years typically. Rising Secular BULL market driven by expanding P/E ratios

Increasing investor enthusiasm brings in “marginal” investors. Declining Secular Bear/Flat market driven by declining P/E ratios

Investor “disgust” pushes money out of the market. “Cyclical” Markets are shorter-term market trends, e.g. 1-5 years


Secular Markets in More Detail


What This Means for Investors

Secular Bull Market Maybe one year out of four is a loser with losses typically

single digits. Buy and Hold works! Just ride the wave higher. Most recent Secular Bull Market was 1982-1999 Most mutual fund managers would have “come of age” during

this Secular Bull Market.

Secular Bear/Flat Market About half the years are losers with double-digit losses

common. Buy and Hold does NOT work. We must adopt more ACTIVE strategies.


Do Traditional Strategies Help?

Typical Asset Allocation Approach Set Allocation Targets According to Investor Objectives/Risk Rebalance to your targets: Annually or every 6 months Forces a Buy Low – Sell High Approach

Setting Targets: Rule of 100 or 120 Rule of 100: 100 – Age = Equity Allocation For a 50-yr old Investor, 100 – 50 = 50% Stocks; 50% Bonds/Cash Rule of 120: 120 – 50 = 70% Stocks; 30% Bonds/Cash

In a Secular Bull Market: The higher the % stocks, the better! Rule of 120 is a winner.

In a Secular Bear/Flat Market: Beats the Market but returns are Mediocre.


Results of Asset Allocation

50/50 split of stocks/bonds rebalanced every 6 months Offers some protection and outperformance, but quite mediocre

UP 14% over 8 years versus S&P which is DOWN about 30% Drawdowns still are significant due to equity exposure

Growth of $100,000 Investment

$60,000

$80,000

$100,000

$120,000

$140,000

Dec-00

Jun-01

Dec-01

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

S&P 500

Stocks and Bonds Rebalanced Every 6 Months


Why Preserving Capital Is the Key to Success

You will easily beat the market if you can avoid or limit losses during bear market periods.


Managing Risk

Preserving capital the key to successful investing

“Macro” or market risk We want to limit our exposure to weak market periods

Adds performance Lessens volatility Can serve to protect other long-term assets

“Micro” or position risk We want to prevent blow-ups in a position

At what point is a personal preference Tools used are a personal preference Knowledge, Maintenance, Stomach


Beware the (Cyclical) Bear

“Cyclical” Bear Market Began in Early January 2008

What does this mean for investors? A strong likelihood that the market will decline by >20% and

will do so in a hurry That rallies will be sharp but brief – mirror image of pullbacks

and corrections in a bull market Cyclical Bear Markets Typically Last about 10-12 Months


Follow the Trend: Invest in the Bull; Avoid the Bear


50,000

70,000

90,000

110,000

130,000

150,000

170,000

190,00050/50 stock/bond portfolio rebalanced

S&P 500

Stocks in Bull Mkts/Cash in Bear Mkts


Or Be Aggressive and SHORT the BEAR


50,000

100,000

150,000

200,000

250,000

300,000

Rebalance Stocks every 6 months

S&P 500

Stocks in Bull Mkts/Cash in Bear Mkts

Profit in Bear Mkts


Secular Bear Markets Mean Big Loss Years

Whereas Secular Bull Markets almost never have a really bad year, Secular Bear/Flat Markets have a really bad year a shocking 1/3 of the time!

Dow Jones Industrial AverageDISPERSION OF ANNUAL STOCK MARKET CHANGES

Percent of Years During Secular Cycles(8+ Cycles: 1901-2008)

RANGE108 Yrs

AVG54 YrsBULL

54 YrsBEAR

<-10% 21% 4% 39%

-10% to +10% 31% 30% 33%

>+ 10% 47% 67% 28%

RANGE108 Yrs

AVG54 YrsBULL

54 YrsBEAR

<-16% 16% 0% 31%

-16% to +16% 50% 50% 50%

>+ 16% 34% 50% 19%

Copyright 2003-2009, Crestmont Research (www.CrestmontResearch.com)


In Conclusion

We are in a secular Bear/Flat market which could last for several more years. Be alert!

We are in a cyclical Bear market – so, ...

You MUST protect assets first and profit second. NOT LOSING is the key to success.

Thus, you need to be more ACTIVE in your investment strategy.

Protect from Market Risk: It is easy to determine when we are in bear market periods. Inverse ETFs offer a simple way to protect assets.

Protect from Position Risk: In a bear market, the predominant trend is DOWN. Actively protect ANY gains and expect uptrends to be fleeting.

MarketTrend Advisors specializes in strategies that help you cope with bear markets while benefitting fully from bull periods.


MARKETTREND ADVISORS

Win in UP and DOWN markets!

Keep in Touch with MarketTrend Advisors by Keep in Touch with MarketTrend Advisors by sending us an email at sending us an email at

[email protected]

Take a look at our performance and ask for our Take a look at our performance and ask for our regular client updates. regular client updates.

Together, we can beat the bear!Together, we can beat the bear!



To contact us:MARKETTREND ADVISORS, Ltd. 3720 Gattis School Road #800 Round Rock, TX 78664

Business hours: Monday through Friday 8:00am to 5:00pm CST Phone: (512) 255-8722Fax: (512) 255-8732Email: [email protected]

Web site: http://www.markettrendadvisors.com



DisclosureDisclosure

MarketTrend Advisors, Ltd. is an independent, S.E.C-registered investment advisor. We are not registered as a broker or dealer, nor do we have any partners or employees who are affiliated with any broker or dealer. See our S.E.C. Form ADV, Part II for official declarations.

The information included herein is for informational purposes only and does not constitute specific investment advice.

Investing in the stock market assumes risk and no assurance is made that investors will avoid losses. No representation is made that investors will or are likely to achieve profits or incur losses comparable to those shown. Performance results are shown for illustration and discussion purposes only. Data from third parties has not been verified, however all information presented is believed to be accurate and fairly presented. All performance figures in this presentation do not include the management fees, commissions, or taxes which would reduce overall returns.

Regarding future performance: Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to corresponding past performance levels.

S&P 500 refers to the Standard & Poor’s 500 Large-Cap Corporations Index. The index is designed to measure performance of the broad based US market and consists of 500 American companies. This index is used for comparative purposes only. (Data is taken from http:/www.stockcharts.com.)

MarketTrend Advisors - Coping With Bear Markets 023009

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