Skip to main content

The great "bear market rally" post

So, the question before us today is: "are we due for a bear market rally in shares?".

Let me say up front that I have no idea whether or not the greatly expected bear market rally will materialize anytime soon.

Having said that, let's hear from some gentlemen who have recently expressed their views on this topic publicly: investors Barton Biggs and Marc Faber.

Hedge fund manager and author, Barton Biggs recently offered his opinion in a Financial Times comment piece entitled, "The mother of bear market rallies is on the horizon".

Noting at the outset that he had misjudged the "severity and duration of this panic", Biggs goes on to say that stock valuations are cheap and that global markets have been battered and "are deeply oversold". When combining these factors with the pervasive negative sentiment, he finds that we may soon see the setup for a significant bear market rally.

Here's an excerpt from Biggs' piece:

"The systematic work that we do on measuring sentiment (and we monitor about 20 indicators for the US and a dozen or so for other equity markets) show very extreme and in many cases record levels of bearishness. Obviously not every indicator is at an all-time high, and in some the history is short - but the message is powerful.

Furthermore, there is compelling evidence that investors, hedge funds, pension and mutual funds, and the public are not just talking bearish, they have raised astounding amounts of cash. I am chastened by the fact that all the data we look at are from the past 40 years, which was really just one great magnificent secular bull market of wealth creation marked by periodic bears that were opportunities to buy. No one knows what levels of pessimism were necessary to spawn the 40 per cent 1929 rally during a massive secular bear market.

Nevertheless, I've never seen capitulation and despair like this. We must be pretty close to maximum bearishness."

Don't get too excited by Biggs' optimism; he notes that he is still hesitant to commit himself until he sees further signs of a bottom. However, for those waiting in the wings, looking for a more optimistic view for the stock markets, Biggs' note might provide some food for thought.

Onto our second guest forecaster, Marc Faber. Whereas Biggs is rather optimistic that the worst case scenarios for the global economy will not pan out, on this point Faber does not shy away from this reputation as "Dr. Doom".

He says that the global economy is going into a severe recession, with emerging market economies being hit the hardest. In fact, during a recent Bloomberg TV interview, Marc said that the global economy "is imploding". He expanded upon these points in a seperate Bloomberg radio interview.

In spite of this gloomy outlook, Faber says that a near-term rally is quite possible for shares, given their recent sharp declines. However, he cautions that traders will probably have to be alert and exit their positions in stocks and index futures by early next year.

In fact, Faber's view of the next few months may also turn out to be a preview of the next decade for traders and investors. Marc recently told CNBC that we are now in "a traders' market", and that Warren Buffett's buy-and-hold approach to investing is dead for the next 10 years.

What lessons have you learned from this latest bear market in shares? Are you taking the view of a trader, or that of a long-term investor in shares?

Maybe this market will require or reward some synthesis of the two disciplines (trading/speculating vs. investing). What do you think?

Related articles and posts:

1. Responding to bear market conditions - Finance Trends Matter.

2. "Faber: Buffett buy-and-hold method dead" - MoneyNews.

3. Bear market rallies since October 2007 - Big Picture.

4. "Where have all your savings gone?" - The Economist.

Popular posts from this blog

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Slate profiles Victor Niederhoffer

Slate's recent profile of writer/speculator, Vic Niederhoffer has been getting some attention from traders and finance types in recent days. I thought we'd take a look at it here too, to offer up some possible educational value from Vic's experiences with trading and loss. Here's an excerpt from Slate's profile of Victor Niederhoffer : " I've enjoyed getting your e-mails. It sounds like you've thought a lot about being wrong. Well, the reason you contacted me, to call a spade a spade, is that I'm sort of infamous for having made a big, notorious, terrible error not once but twice in my market career. Let's talk about those errors. The first was your investment in the Thai baht, which pretty much wiped you out when the Thai stock market crashed in 1997. I made so many errors there it's pathetic. I made one of my favorite errors: "The mouse with one hole is quickly cornered." That is key. There are certain decisions you make in li

Clean Money - John Rubino: Book review

Clean Money by John Rubino 274 pages. Hoboken, New Jersey John Wiley & Sons. 2009. 1st Edition. The bouyant stock market environment of the past several years is gone, and the financial wreckage of 2008 is still sharp in our minds as a new year starts to unfold. Given the recent across-the-board-declines in global stock markets (and most asset classes) that have left many investors shell-shocked, you might wonder if there is any good reason to consider the merits of a hot new investment theme, such as clean energy. However, we shouldn't be too hasty to write off all future stock investments. After all, the market declines of 2008 may continue into 2009, but they may also leave interesting investment opportunities in their wake. Which brings us to the subject of this review. John Rubino, author and editor of GreenStockInvesting.com , recently released a new book on renewable energy and clean-tech investing entitled, Clean Money: Picking Winners in the Green Tech Boom . In Clean