THE SOUTH AFRICAN INDEX INVESTOR

“Greater rewards, lower costs”

TOOL BOX

Investment Philosophies, Theories and Practices (continued…)

 

Bull and Bear Stock Markets

 

Both bull and bear markets are inevitable. Many smart investors try to anticipate these events – to be out of the market during the bear phase and in the market when the bull market starts - but both are very difficult to time correctly. For example, when a bear market ends, a strong upward move in prices can occur in a very short time. If you are out of the market by then, you will miss the majority of the gains that will transpire during the bull market phase.

 

Usually, a bear market precedes a recession, where the market starts to discount a future slowdown in the economy by analysing economic indicators such as:

 

· Decreasing plant utilisation.

· Decreasing steel output.

· Decreasing motor and home sales.

· Increasing unemployment.

· Increasing inflation or interest rates.

 

Bear markets may start with some sort of a crash – a major drop within a few days when investors least expect it. Some good market indicators that a bear market is lurking around the corner are:

 

· Investors become more and more optimistic as stock prices continue to increase, even if   professionals are becoming wary that prices cannot go up much further.

· Speculative new stock issues are flooding the market.

· Business indicators, such as production plant utilisation, employment figures, and fixed investment are booming.

· Low dividend yields (2% and less) and high P/E ratios (20 plus).

· Inflation and Interest rates are starting to increase.

 

The start of bull markets are probably more difficult to determine than the start of a bear market. Investors often do not realise they are in a bull market until the market has been going up for some time. Nonetheless, some good indicators of an early bull market are:

 

· Many stocks have low P/Es (less than 10) and high dividend yields (5% plus).

· The investment public and even market experts are pessimistic about the outlook for the stock market.

· Stock prices do not drop on bad news – an indication that the market is close to its low.

· The market recently experienced a major decline.