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Trading in today’s markets can be profi table,

but in order to achieve success, you need

to know where to look. Opportunities are

currently available in many different sectors around

the world—all you need to do is fi nd them and put

your money to work.

Nobody understands how to do this better than John

Nyaradi—Publisher of Wall Street Sector Selector—

and now, with Super Sectors, he reveals how you can

avoid bear markets and prosper during bull markets

by deploying sector rotation techniques using

exchange traded funds (ETFs).

Whether you’re an aspiring trader or seasoned pro,

this book has what you need to succeed in the years

ahead. Written in a straightforward and accessible

style, it skillfully details a proven approach to

identifying the hottest sectors in the world and

investing in them using ETFs—all while minimizing

potential risks. Along the way, Nyaradi examines

how to best analyze these different sectors, such as

technology, energy, and health care, and profi t from

the opportunities they present.

Divided into six comprehensive parts, this reliable

resource:

• Provides valuable insights into the features and

benefi ts of various ETFs and why they’re a great

choice for today’s active markets

• Highlights sector trading strategies and how this

style of active portfolio management can be one of

the most successful you’ll fi nd

• Discusses different types of trading systems—from

the simplest for people who don’t want to make

trading a “job” to the most complex for professionals

who constantly monitor the markets

• Identifi es fi ve “super sectors” that will likely

outperform the market due to an approaching

tsunami of societal and fi nancial change

• Interviews well-known experts in the fi elds of

investing, technical trading, economics, and various

market sectors, who share their views about what

lies ahead for investors

The “buy-and-hold” strategy of yesterday won’t

work in today’s investment environment. Super

Sectors will show you what can work, and how you

can successfully implement this approach into your

everyday investment endeavors.

( C O N T I N U E D F R O M F R O N T F L A P )

( C O N T I N U E D O N B A C K F L A P )

S U P E R S E C T O R S

H O W T O O U T S M A R T

T H E M A R K E T U S I N G

S E C T O R R O T A T I O N

A N D E T F s

J O H N N YA R A D I

J A C K E T D E S I G N : P A U L M c C A R T H Y

J A C K E T I M A G E S : © I S T O C K P H O T O

A U T H O R P H O T O G R A P H : J A R E D L E W I S

JOHN NYARADI is Publisher

of Wall Street Sector Selector:

Professional ETF Trading

(www.wallstreetsectorselector.com), an

online newsletter specializing

in sector rotation trading

techniques and exchange

traded funds. He is also

President of Ridgeline Media Group, LLC. Nyaradi’s

articles on investing have appeared in major

online fi nancial publications, including Dow Jones

MarketWatch, Trading Markets, MoneyShow.com,

Yahoo! Finance, InvestorsInsight.com, Fidelity.com,

Seeking Alpha, ETF Daily News, iStockAnalyst,

and many others. He has also appeared as a guest

on the Business TalkRadio Network. Visit www.

supersectors.net for a special offer from Wall Street

Sector Selector and more resources and information

about exchange traded funds and sector rotation.

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NYARADI

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AND ETFs

“ John does an excellent job explaining how to make money using sector

ETFs. He has outlined a great plan for those seeking to win with the current

super sectors.”

—DAMIEN and DEREK HOFFMAN, cofounders, WallStCheatSheet.com

“ Super Sectors offers investors a clear and practical plan for navigating today’s

markets . . . a must-read for those looking for a new approach in a volatile

fi nancial world.”

—STEVE GEAR, Editor, Business/Financial News, BeforeItsNews.com

“ Investors new to ETFs will appreciate this easy-to-understand book as it has an

excellent overview of sector ETF selections as well as alternative asset classes,

trading systems, and psychology. My favorite part of the book is the interviews

with the experts.”

—GRACE CHENG, founder, DailyMarkets.com; author, 7 Winning Strategies for Trading Forex

“ This book offers a complete guide for those with little knowledge of exchange

traded funds. It explains what they are and what’s available as well as outlines

many practical strategies that can be used for profi table investing. John Nyaradi

has explained this subject in a simple, down-to-earth way that will appeal to

relatively inexperienced investors, yet also deals with sophisticated concepts

that veteran traders will fi nd useful.”

—MARTIN J. PRING, President, Pring.com; Chairman, Pring Turner Capital Group;

author, Martin Pring’s Introduction to Technical Analysis, Martin Pring on Market Momentum,

and Technical Analysis Explained

SUPER SECTORSH O W T O O U T S M A R T T H E M A R K E T U S I N G S E C T O R R O T A T I O N A N D E T F s

P R A I S E F O R“ Included among the ‘Year’s Top Investment Books’ in the 2011

Stock Trader’s Almanac, Super Sectors identifi es fi ve ‘super sectors’

that will likely advance far faster and higher than the general indexes

due to several economic and social ‘megatrends’ on the horizon.”

—JEFFREY A. HIRSCH, Editor in Chief, President, Stock Trader’s Almanac

P1: JYSFM JWBT315-Nyaradi July 30, 2010 16:43 Printer: Courier Westford, Westford, MA

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Additional Praise for Super Sectors

“John Nyaradi’s Super Sectors is that rare book that can give anyone—from arelative newcomer right up to the most expert reader—insights into action-able ways to profit from the information presented. From the psychologyof investing, to ‘point and figure charting’ and ‘moving average crossovers,’John shows how trading ETFs with sector rotation can beat the pants off‘buy and hold’. He clearly illustrates why his theories have worked in thepast and makes a good case for why they’ll continue to work in the ‘new nor-mal’ environment since the 2008 market melt-down. His concluding segmenton the Super Sectors he sees dominating future returns should contributemightily to your future financial well being while letting you feel confidentthat you’re well positioned for what’s over today’s investment horizon.”

—Dr. Paul Price, Founder/Editor, www.BeatingBuffett.com

“If the first decade of the twenty-first century has proved anything, it is thatinvestors cannot afford to let precious time slip through their investmentfingers with a buy and hold strategy. Change is occurring too rapidly andtrends shift with ever-greater frequency, rendering buy and hold as a highrisk strategy unfit for the times. Super Sectors goes right to the heart of thisissue and provides investors with the vital tools (and reasoning) that willenable them to take advantage of the opportunities such change presentsand to help avoid its pitfalls. Investors who read this book will not let thatmost precious of resources—time—slip by.”

—Vinny Catalano, CFA, President and Global Investment Strategist, BlueMarble Research; Nonresident Senior Fellow, Information Technology

and Innovation Foundation; Former President, New YorkSociety of Security Analysts; Author, Sectors and Styles

“For investors concerned about market volatility and global trends, Super

Sectors demystifies the technical approaches used by professional tradersand offers simple techniques to reduce risk, manage a collection of sectorETFs, and keep a portfolio tuned into the strongest trends. John Nyaradi’sbonus interviews on the subject of Super Sectors, with more than fifteeninvestment experts, are also more than worth the price of the book.”

—Mark Kramer, Editor, Confident Investment Strategies

“This book clearly answered why buy and hold is the most dangerous anddamaging piece of advice in Wall Street. It reviews what ETFs are and howthey work. If you want to manage your own retirement or trading accountsthrough ETFs, this book is a must for you. It summarized major and basicsectors, and how to rotate with scientific methods and trading systems. Withmore and more people involved in their own financial management, I highlyrecommend the book to all investors.”

—John Wang, CEO, AbleSys; Author, AbleTrend

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Super Sectors

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Founded in 1807, John Wiley & Sons is the oldest independent publishingcompany in the United States. With offices in North America, Europe, Aus-tralia and Asia, Wiley is globally committed to developing and marketingprint and electronic products and services for our customers’ professionaland personal knowledge and understanding.

The Wiley Trading series features books by traders who have survivedthe market’s ever-changing temperament and have prospered—some byreinventing systems, others by getting back to basics. Whether a novicetrader, professional or somewhere in between, these books will providethe advice and strategies needed to prosper today and well into the future.

For a list of available titles, visit our Web site at www.WileyFinance.com.

ii

http://www.WileyFinance.com


Super SectorsHow to Outsmart the Market Using

Sector Rotation and ETFs

JOHN NYARADI

John Wiley & Sons, Inc.

iii


Copyright © 2010 by John Nyaradi. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted inany form or by any means, electronic, mechanical, photocopying, recording, scanning, or oth-erwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act,without either the prior written permission of the Publisher, or authorization through paymentof the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive,Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com.Requests to the Publisher for permission should be addressed to the Permissions Department,John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their bestefforts in preparing this book, they make no representations or warranties with respect to theaccuracy or completeness of the contents of this book and specifically disclaim any impliedwarranties of merchantability or fitness for a particular purpose. No warranty may be createdor extended by sales representatives or written sales materials. The advice and strategies con-tained herein may not be suitable for your situation. You should consult with a professionalwhere appropriate. Neither the publisher nor author shall be liable for any loss of profit or anyother commercial damages, including but not limited to special, incidental, consequential, orother damages.

For general information on our other products and services or for technical support, pleasecontact our Customer Care Department within the United States at (800) 762-2974, outside theUnited States at (317) 572-3993 or fax (317) 572-4002.

Wiley also publishes its books in a variety of electronic formats. Some content that appearsin print may not be available in electronic books. For more information about Wiley products,visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Nyaradi, John.Super sectors : how to outsmart the market using sector rotation and ETFs / John Nyaradi.

p. cm. – (Wiley trading ; 468)Includes index.ISBN 978-0-470-59250-2 (cloth); ISBN 978-0-470-88030-2 (ebk);ISBN 978-0-470-88031-9 (ebk); ISBN 978-0-470-88032-6 (ebk)

1. Exchange traded funds. 2. Stock funds. 3. Portfolio management. I. Title.HG6043.N93 2010332.63′27–dc22

2010030440

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

iv

http://www.wiley.com/go/permissions

http://www.copyright.com

http://www.wiley.com


For Ann, Chris and Dan,

with love

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vi


Contents

Preface xiii

Acknowledgments xvii

PART I Five Wall Street Fairy Tales and Why theConventional Wisdom is Flawed 1

CHAPTER 1 The Bear Facts about Bear Markets 3

The Bear Facts: Another Bear is Out There Waiting to Maul

Your Portfolio 3

Conclusion 7

CHAPTER 2 The Fairy Tale of Buy and Hold 9

Ten Years of Negative Returns 9

Impact on Retirement 11

The World is Changing 18

Conclusion 18

CHAPTER 3 Four More Wall Street Fairy Tales:Conventional Wisdom ThatCould Cost You Money 21

Is Asset Allocation the Answer? 21

The Fairy Tales Revealed 23

Conclusion 24

vii


viii CONTENTS

PART II Why Exchange Traded Funds? 27

CHAPTER 4 History and Growth of ExchangeTraded Funds 29

From Zero to 836 in 19 Short Years 29

Conclusion 32

CHAPTER 5 Types of Exchange Traded Funds 33

Standard Exchange Traded Funds 34

Index Funds 34

Market Cap and Style Funds 35

Bond Funds 35

Sector Exchange Traded Funds 35

Global Regions and Country Specific Exchange Traded Funds 36

Inverse Exchange Traded Funds 37

Leveraged Exchange Traded Funds 38

Actively Managed Exchange Traded Funds 41

Currency Exchange Traded Funds and Exchange Traded

Notes 42

Conclusion 43

PART III Sector Rotation: What It Is andWhy It Works 45

CHAPTER 6 Sector Rotation—The Traditional View 47

There’s Always a Bull Market Somewhere 47

Nine Basic Sectors 49

Will This Time be Different? 50

The Business Cycle Has Not Been Repealed 51

Why Use Sector Rotation? 52

Conclusion 52

CHAPTER 7 The New Science of Sector Rotation 55

It’s a Brave New World 55

Are There Only Nine Sectors? 56


Contents ix

The Velocity of Money and the Incredible Disappearing

Investor 56

Conclusion 65

PART IV Trading Systems Designed toOutperform the Indexes 67

Your Personality 67

Your Lifestyle 68

Your Goals 68

CHAPTER 8 Almost Like Buy and Hold 69

But It’s Not That Easy 71

Cut Your Losses and Let Your Winners Run 72

“Almost Like Buy and Hold” Trading Rules 73

Conclusion 74

CHAPTER 9 The Simple Trading System 75

Conclusion 82

CHAPTER 10 The Golden Crossover TradingSystem 85

Conclusion 90

PART V The Sector Scoring System: TradingConcepts, Challenges and Conundrums 91

CHAPTER 11 The Five Signals for Entering a Trade 93

Signal No. 1: Point and Figure Charts Buy Signals 93

Signal No. 2: Point and Figure Charts: Trend and Bullish

Price Objective 98

Signal No. 3: Moving Average Convergence Divergence

(MACD) 101

Signal No. 4: Relative Strength Index (RSI) 107

Signal No. 5: Relative Strength 108

Conclusion 110


x CONTENTS

CHAPTER 12 Scoring Your Trades 113

Selecting What You Want to Trade 113

Scoring Your Trades: The Heart of the System 114

Scoring the Indicators 123

Conclusion 130

CHAPTER 13 Getting Out is Harder ThanGetting In 131

Selecting What You Want to Trade: The Other Side of

the Coin 131

Getting Out of a Trade: How, When, Where 132

Risk Management and Position Size 144

Exiting a Trade or “What Now?” 146

Signs of Weakness 147

Conclusion 150

CHAPTER 14 The Psychology of Trading 153

The Biggest Single Risk to Your Trading and Investing

Success is You 153

Begin at the Beginning 154

Greed, Fear, and the Herd 154

Three Secrets to Trading Success 156

Trading and the Art of War 160

The Five Essentials for Victory 161

Trading With the Buddha 162

What Happens When Your System Stops Working 163

How to Manage Drawdowns 164

Conclusion 165

PART VI Super Sectors: Five ‘‘Super Sectors’’That Could Change Your Life 167

CHAPTER 15 Super Sector No. 1: The Rise of Asia 169

A Closer Look at China 169

The Story Doesn’t End with China 171


Contents xi

How Can You Participate? 172

Conclusion 173

CHAPTER 16 Super Sector No. 2: Energy 175

The Bad News about Supply 175

The Bad News about Demand 176

Economic, Political, and Social Impacts 177

Possible Solutions 177

Possible Outcomes 178


Conclusion 180

CHAPTER 17 Super Sector No. 3: Health Care 181

The Aging Baby Boomers 181

Baby Boomers and the Cost of Health Care 182

Growth in National Health Care Expenditures 182

Possible Solutions and Outcomes 183

The Ever-Growing Medical Monster 183


Conclusion 184

CHAPTER 18 Super Sector No. 4: Technology 187

A Connected World 187

Highways in the Sky 189

Emerging Technologies 190


Conclusion 191

CHAPTER 19 Super Sector No. 5: Financials 193

The Financial Sector 193

Warren Buffettology 195

The Dollar and Global Currency Markets 196

Interest Rates 197

Precious Metals 197


xii CONTENTS


Conclusion 198

CHAPTER 20 Ask the Experts: Insights and Advicefrom Today’s Top Investors, Tradersand Managers 201

Larry Connors 201

Dr. Marc Faber 205

Keith Fitz-Gerald 207

Todd Harrison 211

Gene Inger 214

Carl Larry 216

Timothy Lutts 217

Tom Lydon 220

John Mauldin 223

Lawrence G. McMillan 224

Paul Merriman 228

Robert Prechter 230

Jim Rogers 233

Matthew Simmons 234

Sam Stovall 236

Cliff Wachtel 238

Gabriel Wisdom and Michael Moore 241

Conclusion 245

APPENDIX ETF Resources 247

Web Sites 247

Exchange Traded Funds Providers 247

Books 248

Notes 251

About the Author 253

Index 255


Preface

T hanks so much for sharing your valuable time with me and my book,Super Sectors: How to Outsmart the Market Using Sector Rotation

and ETFs.This book has been designed to help you avoid bear markets and

prosper during bull markets by deploying sector rotation techniques usingExchange Traded Funds.

Some of the techniques outlined in this book are so simple that a sixthgrader could do them while others are geared towards the professionaltrader.

Whether you’re a novice trader just looking for ways to get started ora seasoned pro, in these pages you’re going to be introduced to valuabletrading concepts and get detailed insight into trading systems, opportuni-ties and obstacles so that by the time you reach the end, you will be armedwith a powerful arsenal to help you successfully trade Exchange TradedFunds using sector rotation techniques.

If you’ve suffered through the Bear Market of 2008 and feel less finan-cially secure than you did on October 9th, 2007, when the S&P 500 reachedits record closing peak of 1565, you’re not alone. Since that fateful autumnTuesday afternoon, trillions of dollars of assets have been lost in globalstock markets and much of that money will likely never be recouped byindividual investors. If you lost money over the course of the Bear Marketof 2008, I’m looking forward to discussing ways that you can potentiallyavoid losing money during future bear markets.

However, bear markets aren’t the only reason, in my opinion, to active-ly trade your assets and I say this because as bad as this bear market hasbeen, the losses suffered since late 2007 are not the worst part of the news.

Stock market activity over the last ten years has proven that “buy andhold” is a dead concept and it’s very likely that going forward over the nextten years, “buy and hold” will continue to be an invalid and ineffective con-cept. Because over the last ten years, the S&P 500 has generated a negativerate of return and that doesn’t even factor in the ravaging effects that infla-tion has on your portfolio.

xiii


xiv PREFACE

So, in this book we’ll discuss why Wall Street’s “conventional wisdom”may not be effective going forward and we’ll take a close look at the tac-tical portfolio management alternatives that are available to average retailinvestors and professionals alike.

Through the pages of this book, you’ll learn how you can take controlof your destiny and your financial future and not rely on market forces todetermine the outcome of your investing activity.

You’ll get valuable insights into the features and benefits of ExchangeTraded Funds and why they’re a great choice for today’s active markets.

You’ll learn about sector trading and how this style of portfolio man-agement can be one of the most successful you can find and we’ll discussvarious methods of identifying potential “super sectors,” the sectors of themarket that are outperforming the general indexes.

As the old saying goes, “there’s always a bull market somewhere” andthrough these pages you’ll learn techniques for identifying and profitingfrom these “super sectors.”

Trading systems will be discussed in detail, ranging from the most sim-ple for people who don’t want to make trading a “job” all the way to themost detailed and complex systems for professionals who monitor the mar-kets on a daily or even minute by minute basis.

Beyond trading systems we’ll look at concepts, challenges and conun-drums that all active traders face and how to meet those challenges headon and conquer them.

We’ll identify five “super sectors” that quite likely will advance farfaster and far higher than the general indexes due to several economic andsocial “mega trends” that lie just ahead. We’ll dive into these macro trendsand then identify the sectors that will allow you to gain exposure to these“super sectors” over the coming years.

Finally, we’ll have the opportunity to listen to “Interviews with theExperts” in which we’ll hear from well-known experts in the fields ofinvesting, technical trading, economics and various market sectors, andwe’ll gain insight into their views about what opportunities and dangers lieahead for us as investors.

By the time you finish reading this book, you’ll have a wide arsenal ofweapons to adapt to your own temperament, trading style and lifestyle soyou’ll be able to design a complete trading program uniquely suited to you.

And this is important because the bottom line in today’s post-crash

world is that you’re on your own.

You are on your own and you need to arm yourself with the knowledgenecessary to survive during what could be very difficult days ahead. Nolonger can you afford to believe that “the market will come back” or thatit will keep going up forever. No longer can you believe that “everythingwill work out” and no longer can you believe in the “conventional wisdom”spouted by Wall Street and in most of the financial media.


Preface xv

The Great Recession of 2008–2009 has changed everything in the in-vesting landscape, and the “mega trends” I’m going to describe couldchange it even more drastically. It’s quite likely that Darwinian principlesof natural selection will be in play and only those who will be able to adaptto this new world will survive and prosper.

A successfully-managed tactical trading program can be the most dif-ficult job in the world or the easiest. It can be one of the most lucrativethings you could ever do or it could lead you to financial ruin. Many, manypeople have tried and failed at active trading and the goal of this book is toarm you with the tools that you need to be successful.

It’s not an easy path and it’s lined with the school of hard knocks. Alongthe way you will experience setbacks and failures and feel like giving up,probably more than once. But if you can stick with it, if you can becomeone of the few who can succeed, you will have the ability to protect andgrow your net worth if that’s your goal or you will possess the tools nec-essary to make trading a full time career or second career to supplementyour retirement or regular income.

If you can be one of the few who can succeed, you can literally becomelike the ancient alchemists, able to create money literally out of thin air.When you sit down at your computer and enter some numbers on an orderscreen, only two things can happen. The numbers can get bigger and bepainted green or they can get smaller and be painted red.

The goal of Super Sectors is to help you find and stay on the difficultand challenging route to green and growing numbers so that you can growyour wealth, achieve your financial goals and meet the challenges of thedemanding days ahead.

Finally, I invite you to visit www.SuperSectors.net for more valuableinformation about sector rotation using Exchange Traded Funds.

There you’ll be able to subscribe to a special membership offer fromWall Street Sector Selector, my online newsletter covering sector rotationand Exchange Traded Funds, as well as get more in depth research, reportsand links to other leading financial web sites and portals.

I wish you all the best in your endeavors and look forward to workingwith you towards your trading success.

JOHN NYARADI

PublisherWall Street Sector Selector

Bend, OregonAugust 2010


xvi


Acknowledgments

W riting a book like this is a mammoth task that couldn’t possiblybe accomplished by one person alone, no matter how talented orenergetic the author might be.

Many people helped Super Sectors come to fruition and I would par-ticularly like to thank the following individuals for their help, support andinvaluable assistance:

Gabriel Wisdom, fellow pilot, Managing Director and Founder ofAmerican Money Management, LLC., who made this entire endeavorpossible.

My editors at John Wiley and Sons, Laura Walsh and Judy Howarth, fortheir expert guidance, encouragement and insight.

The financial and investment experts who were so kind to offer theirexpertise, insights and unique knowledge to make “Ask the Experts” sucha valuable portion of this work. These contributors include Larry Conners,Dr. Marc Faber, Keith Fitz-Gerald, Todd Harrison, Gene Inger, Carl Larry,Timothy Lutts, Tom Lydon, John Mauldin, Lawrence McMillan, PaulMerriman, Michael Moore, Robert Prechter, Jim Rogers, MatthewSimmons, Sam Stovall, Cliff Wachtel, Gabriel Wisdom.

And finally, a special thanks to my family; my wife, Ann, and sonsDan and Chris for your understanding and encouragement during all ofthe hours and days that disappeared so that Super Sectors could becomea reality.

xvii


xviii


Super Sectors

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P1: OTAc01 JWBT315-Nyaradi July 13, 2010 7:0 Printer: Courier Westford, Westford, MA

P A R T I

Five Wall StreetFairy Tales and Why

the ConventionalWisdom is Flawed

T here are many good reasons to actively manage your portfolio but oneof the most compelling is to try to avoid the devastating consequencesof bear markets.

Bear markets happen more frequently than you might imagine and dodevastating and long-lasting damage to investors’ portfolios. But it is pos-sible to avoid these downdrafts and later we’ll get into trading systemsranging from simple to complex that are designed to do just that.

For decades, Wall Street and the financial media have fed investors asteady diet of investment advice and concepts that have been proven to bedevastatingly flawed during the Tech Wreck of 2000–2002 and again duringThe Great Recession of 2008.

The financial carnage has been well documented in the press withtrillions in assets disappearing, maybe forever, as investors followed ad-vice like “buy and hold,” “invest for the long term,” and “hang on, it willcome back.”

1


2 FIVE WALL STREET FAIRY TALES AND WHY THE CONVENTIONAL WISDOM IS FLAWED

And the result was no different during The Great Recession of 2008than it was during the Tech Wreck or the Bear Market of 1982 or any bearmarket dating back to the Great Depression.

In every case, the average retail investor typically bought at the top andsold at the bottom and watched the stock market devour his or her hard-earned savings. As the old saying goes, “the stock market will make as biga fool out of as many people as possible,” or put another way, “the marketwill do everything it can to separate you from your money.”

In this section we’re going to take a look at the 5 Wall Street FairyTales that I feel are at the root of these problems and how they’re a realand present danger to your net worth. You’ve heard of all of these beforebut we’re going to delve into each one and see why it’s a hazard to yournet worth.

And the danger isn’t past once The Great Recession ends becausethere will be other bear markets and other dangers and challenges alongour paths.

So let’s start with a look at bear markets and how they’re anever-present danger to your portfolio and financial future.


C H A P T E R 1

The Bear Factsabout Bear

Markets

B ear markets are a frequent, normal part of the stock market life cy-cle, just like recessions are a normal part of the economic cycle andboth of these facts create a potentially very dangerous environment

for investors around the world.

THE BEAR FACTS: ANOTHER BEARIS OUT THERE WAITING TO MAULYOUR PORTFOLIO

Bear markets are defined as drops of 20 percent or more in the overallmarket typically as defined by the S&P 500, the 500 most widely held stocksin the United States.

Bear markets usually precede recessions by nine months.Bear markets aren’t as rare as you might imagine. There have been

26 bear markets in history and they have occurred on the average of lessthan one every six years.

The typical decline of the major indexes in a bear market is more than−35 percent.

Put those two facts together and once every five to six years you ex-pose yourself and your nest egg to the chance of losing −35 percent. Thearithmetic regarding losses of this magnitude isn’t pretty, as outlined inTable 1.1.

3


4 FIVE WALL STREET FAIRY TALES AND WHY THE CONVENTIONAL WISDOM IS FLAWED

TABLE 1.1 Bear Market Arithmetic

Profit Required toAmount of Loss Return to Breakeven

20 percent 25 percent30 percent 43 percent50 percent 100 percent

In recent years we have seen “ultra bears”—in 1973–1974 with a de-cline of −48 percent, 2000–2002 declining −49 percent and 2008 declining−49 percent.

Recovery from these bear markets can be long and hard. On average,since 1929, the time to reach breakeven has been more than five years,however this time can be much, much longer. The 1929 bear market took25 years to breakeven, the 1973–1974 bear market took more than 8 yearsto break even.

From 2000 to 2010, the market has still not managed to hold onto itsprevious highs, and investors have endured a negative rate of return formore than ten years as we went from the Tech Wreck to momentary newhighs and then into The Great Recession of 2008.

In 2010, we heard a lot about the “lost decade” since the S&P 500 gen-erated a negative rate of return between 2000 and 2010. However, it wasn’tthe first secular bear market nor will it likely be the last. The most famousbear was the 1929 crash that lasted more than 20 years. Less famous is thebear that ran from 1966 to 1982, a period of 17 years, and as I write thisin early 2010, we are still not back to break even from the bear that beganin 2000.

Over the course of the last 80 years we have had three secular bearmarkets lasting a total of 48 years. Put another way, someone who beganinvesting in 1929 has spent 60 percent of his investing career in bear mar-kets with negative or only slightly positive returns to show for his or herefforts.

Figure 1.1 shows what a typical bear market looks like.In the chart in Figure 1.1 it’s easy to see the devastating drop of the

S&P 500 between the beginning of 2008 and the March, 2009 lows. And thistype of action isn’t so unusual if we look a little farther back at the TechWreck of 2000–2002 as shown in Figure 1.2.

Comparing the two charts, a couple of interesting facts immediatelystand out. Both bear markets started from approximately 1500 on the S&P,only nearly a decade apart from each other.


The Bear Facts about Bear Markets 5

FIGURE 1.1 Bear Market of 2008Chart courtesy of www.StockCharts.com

The 2000 Tech Wreck declined approximately −48 percent over3.5 months while the Bear Market of 2008 declined a total of approximately−55 percent over five months.

And the subsequent rebounds look very similar when put side by side.Figure 1.3 shows what the last ten years look like altogether:

In Figure 1.3 we can see how in very real terms the stock market, asmeasured by the S&P 500, has generated a negative rate of return since2000. And for many investors who tend to buy high and sell low, the returnshave been much, much lower.

Of course, the picture becomes even bleaker when you factor inflationinto the picture and the lost opportunity costs of nearly a decade of yourinvesting life.

Documents

OUTSMART SUPER - download.e-bookshelf.dedownload.e-bookshelf.de/.../0000/5805/87/L-G-0000580587-000238355… · author, Martin Pring’s Introduction to Technical Analysis, Martin