The Dow Jones Industrial Average has fallen 12.4% from its May highs, and Money Morning experts anticipate more volatility ahead in 2016. That’s why they’ve compiled their complete bear market investing guide for 2016…
The biggest warning sign of a bear market in 2016 was the stock market crash in China. After peaking in June, Chinese stocks tumbled 40%. That rattled markets worldwide.
Another bear market warning began in Q2 2015. The slumping Dow Transportation Index dropped 9% in early June. The Dow Transports is a leading indicator of where the stock market is headed. That’s because people and businesses ship and send more products when the economy is humming, and they pull back when it isn't.
Now corporate earnings are starting to pour in, and many are expected to disappoint. That will only put more pressure on already fragile markets.
A bear market is defined as a sharp shift in investor sentiment from optimism to widespread fear, pessimism, and panic. According to The Vanguard Group, "While there's no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period." Anything less is referred to as a "correction."
Most market watchers agree we're due for a bear market in 2016, as this has been the longest bull market since the end of World War II.
By the above definition, the S&P 500 hasn't yet crossed into a bear market in 2016. The index is down roughly 13% from its May 21 record close of 2,130.82. It would need to fall to 1,706 to be in official bear-market territory.
Stocks rebounded slightly last week, but many experts agree the rebound is temporary.
While we haven’t hit the 20% threshold yet, Money Morning Global Credit Strategist Michael Lewitt says this is already a bear market…
Why This Is a Bear Market
"More than 50% of S&P 500 stocks are now down 20% or more from their 52-week highs – and it is now a question of how loud the bear growls," Lewitt said. "I think we have at least another 10% down. The question is whether we just really crash to something like 1,500."
According to Lewitt, there were several factors over the last two years that indicated a 2016 bear market was coming…
"China is a house of cards whose debt-engorged economy hit a wall in mid-2014 after seeing its total debt grow from $7 trillion in 2007 to $28 trillion (it is now probably over $30 trillion)," he said. "This then caused global commodities markets, which were inflated by the Chinese debt explosion, to collapse."
"The last piece of the puzzle was the end of the Federal Reserve's quantitative easing (QE) program in October 2014 and the beginning of its effort to raise interest rates in 2015, though this didn't occur until last December and is more likely than not to be reversed in 2016 if markets continue to sell off and the U.S. economy continues to weaken."
These drops and the likelihood of more selling pressure have many investors panicked. But according to Money Morning experts, taking your money to the sidelines is a major mistake.
That's why they've developed this strategy for investing in a bear market. It's the best way to protect your money plus profit from the rare opportunity we have now…
How to Invest in Bear Market 2016
Don’t be surprised if the markets continue lower from here.
The slowdown in China isn't over. Plunging oil prices have led to job losses, cutbacks in capital spending, and declines in global government revenue. And investor confidence in the willingness or ability of central banks to boost their economies is fading.
But according to Money Morning Chief Investment Strategist Keith Fitz-Gerald, "There's always opportunity in chaos and current market conditions are no exception."
In fact, there are a few ways to make money in an environment like this. The first one is trading. (Don't worry – if you aren't a trader, or don't want to try, we also have tactics for you, too. Keep reading.)
"The bull market's end gives traders the juiciest opportunities ever," said Money Morning Options Trading Specialist Tom Gentile. Gentile just led his subscribers to a 100% return in the first week of the year – as the Dow fell more than 900 points.
"If you're trading, this is a great time to be in the market. There are bargains all over, and even better, the short, sharp market action means options plays can bring in huge returns in short order," Gentile told readers last week.
Gentile informs readers about these types of moves every single week. Investors can get looped in here and find out the method behind his 100% gain.
Another way to profit from this market turmoil is with an inverse exchange-traded fund (ETF). These are designed to gain while markets fall.
Money Morning Capital Wave Strategist Shah Gilani likes three of these ETFs. Each one is designed to track the inverse performance of a specific index, either the Dow, S&P 500, or Nasdaq. These ETFs will rise as a bear market drags down the broader indexes.
Gilani also has a specific short-term move for when he believes markets will fall hard that day or the next. He gives you all four of these picks here.
Finally, for long-term investors looking to hold stocks for five or 10 years, Fitz-Gerald says to focus on investing in quality businesses that sell products and services the world cannot live without right now.
"In tech, that includes names like Facebook Inc. (Nasdaq: FB), Apple Inc. (Nasdaq: AAPL), and Alphabet Inc. (Nasdaq: GOOGL)," he said. "And select companies like The Coca-Cola Co. (NYSE: KO) that have a long history of increasing dividends through thick and thin. Also, put new money to work in companies like Raytheon Co. (NYSE: RTN).”
Stocks like these are investments. They may be down now, but you’re going to be holding them through several market cycles.
"They may fall a bit with the broader markets, but the markets have a terrific upward bias over the long term. The Dow, for example, returned more than 22,000% over the last century despite two world wars, all sorts of regional conflicts, depression, recession, and more."
Fitz-Gerald reminds investors that are mulling a move to the sidelines to be selective, but be in the game.
Stay informed on what's going on in the markets by following us on Twitter @moneymorning or liking us on Facebook.
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