Wall Street switches to bearish strategy

 
 

Bear markets are a bit like recessions: Investors don’t know they’re in one until it’s almost over. But they can feel the pain.

 

Although a bear market can’t be officially declared yet, traders are certainly pessimistic. The Standard & Poor’s 500 index posted another lacklustre week as Wall Street’s three main stock gauges hovered at their lowest levels of the year.

 

The four-year bull run had catapulted equities markets to all-time highs, with the Dow Jones industrial average smashing through the 14,000 mark in October. A growing number of analysts believe a bear market is now under way, but that doesn’t mean shrewd investors can’t make money.

 

“I do think we are going to end up being in a bear market because the problems with financial stocks are continuing to drag out,” said Peter Dunay, chief investment strategist for New York-based Meridian Equity Partners. “Money will flow from one thing to the next, one week investors will go bottom-fishing and then they’ll sell off on bad news.”

 

Dunay said “it is all about the fast money” these days as big institutional investors – such as hedge funds – lay down bets and cash out quick. That offers some explanation for how stocks have behaved during the past three weeks – and clues about what to expect.

 

This past week, major indexes finished slightly higher. The previous week, the indexes gave up more than 4 percent; and, before that, two days of stunning gains were enough to give the Dow its first weekly advance of 2008.

 

Behind these gyrations are fears that the economy continues to slow, and is even sinking into recession. Analysts are worried that the subprime crisis that roiled markets since the summer are working their way deeper into the economy.

 

Banks have racked up about $150 billion (Dh547.5 billion) in write-offs from bad bets on asset-backed securities. And there’s continued evidence the pain is spreading: This past week bond insurer Financial Guaranty Insurance Co said it wanted to separate into two companies, splitting its municipal bond business from its insurance on riskier financial instruments.

 

Meanwhile, recent data indicates that consumer spending – the biggest driver of the US economy – is slowing. The full effects of this would be widespread, hurting everything from profit at retailers to employment.

 

All of that could easily tip major market indexes into the technical definition of a bear market, which is when stocks are down 20 per cent from a recent high. The Dow, S&P 500 and Nasdaq composite are all on the verge of hitting that mark.

 

The S&P 500, considered the broadest market indicator, was down 13.75 per cent from its October 9 high as of Friday. The Dow was down 12.82 per cent and the tech-heavy Nasdaq was off 18.79 per cent, both from their October highs.

 

However, experts warn that the bear market label might give investors a false impression that they’re locked into losses.

 

“There’s an old adage that fortunes are made in bear markets, but you just don’t know it at the time,” said Quincy Krosby, chief investment strategist at The Hartford. “There are trading opportunities because there are some strong spikes. ... Emblematic of a bear market is that you sell into strength and buy on the dip.”

 

Krosby said that investors should look for solid companies that are “beaten down for no apparent reason” that will provide long-term opportunity. Even more specifically, she said, at some point, financial companies like banks and brokerages will truly be the sector to watch.

 

Investment banks like Bear Stearns Cos and Merrill Lynch & Co have plunged in the past year on credit concerns. This past week analysts who cover the financial sector warned that even Goldman Sachs Group Inc – which has so far escaped the brunt of the crisis – will begin to show strain when it reports first-quarter results next month.

 

Dunay agrees that the financial sector will be a crucial one for a turnaround. In the meantime, he said there are different strategies short-term and long-term investors should take.

 

“The idea is if you’re longer term, the investing style will be to preserve your capital,” he said. “For short-term traders, you’re just waiting around for the next big wave.”  (AP)

 
 
 
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