There Are Two Types of Markets, and They Aren't What You Think They Are
Forget the bull and bear labels and look at the market in this way.
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One of the most basic concepts in investing is bull and bear markets. In bull markets, stocks are generally rising, and in bear markets, they are falling. It is a convenient way to sum up overall market conditions, but it is wildly imprecise and often very misleading. Bear markets are inevitable, and they shouldn’t be perceived as negative.
The biggest problem with the bull and bear labels is that they have little to do with the action in the average stock. The indexes are driven by the stocks with the largest capitalization, and a few names will offset the action in thousands of other stocks. The business media does an extremely poor job of covering all the nuances that are occurring.
The Dow Jones is particularly ridiculous with a weighting system based on price. The highest weighted stock in the Dow is Goldman Sachs GS, because it has the highest price at over $700. Nineteen stocks in the Dow have more weight than Nvidia NVDA, which is the largest market capitalization stock in the market. It is a totally illogical approach, but the media treats the Dow as if it is the market.
The point is that if you are using indexes to determine if there is a bull or bear market, you are using flawed data and are likely missing the true nature of the action and where the real opportunities might lie.
Rather than bullish or bearish, I find it much more helpful to think of the market in a different way. My approach is to view the market as either Uptrending or a Stock Picker’s Market.
In an uptrend, the majority of stocks are rising. It has nothing to do with the indexes and is more a function of breadth and the average chart. Call it a bull market if you like, but the important thing is that in this environment, stocks have a tailwind, and it is important to have significant market exposure. The market will bail you out of some poor decisions when there is an uptrend and the goal is to press and to maximize gains. When there is an uptrend, you want to be heavily long.
The other type of market is what I call a Stock Picker’s Market, rather than a bear market. When the uptrend or bull market ends, then the focus must change to managing individual stock positions. Every stock that you own must be evaluated individually to establish if it can be held when the power of the uptrend is no longer driving the entire market. It doesn’t matter what the indexes are doing. What matters are the individual stocks that you are holding. There are plenty of stocks that continue to act well when the business media is grumbling about bear markets.
Bad market conditions produce the best stock picking opportunities. Instead of fearing a bear market, it is much more helpful to think of it as a time to focus on dumping stocks that are not technically strong and finding the best new stock picks. Good stock picking in a bad market environment is how you create significant outperformance. Riding a positive trend will help you keep pace in a bull market, but stock picking is how you outperform in a bear market.
In my view, there is no such thing as a bad market. When investors are miserable and the media is full of doom and gloom, that is the time to become excited about the new stock picking opportunities that are being created. It may take some time and patience, but market cycles always turn, and if you focus on quality stock selection, then bear markets are a positive.
The bull and bear market labels are never going to go away, but be skeptical when you see the terms and make sure you focus on individual stocks and not just the headlines in the media.
At the time of publication, DePorre had no position in any security mentioned.
