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The Best Offense is a Good Defense Against a Bear Market

The widely accepted definition of a bear market is when market indexes fall more than 20% from their respective highs.

From the recent all-time highs to the recent 2/24/22 lows, several key markets such as the Nasdaq Composite Index (COMPQ -22.36%), the Nasdaq 100 Index (NDX - 22.07%), Russell 2000 ETF (IWM - 22.90%), S&P Technology (XLK -19.95%), S&P Consumer Discretionary (XLY -24,80%), and S&P 500 Growth Index (SGX -20.68%), have reached bear market classifications. Are these indexes nearing their market capitulation levels?

However, other popular market indexes, including S&P 500 Index (SPX -14.61%), Dow Jones Industrial Average (INDU – 11.34%), NYSE Composite Index (NYA – 10.73%), S&P 400 Mid-cap Index (MID – 15.10%), S&P 500 Value Index (SVX -9.78%) remain in deep correction territories. Do these markets catch up to the bear market declines of their growth, small-cap, and OTC counterparts?

Bear markets often develop because of the imbalances between the demand and supply in the marketplace. The declines are the market’s way to remove the excesses and reset to normal equilibrium. Bear markets tend to hurt investors across the board, from large institutional investors to small mom-and-pop retail investors and everyone in between.

The market actions warn at cyclical bear decline is here or around the corner. A balanced portfolio or a hedge portfolio is likely your best defense.

A hedged portfolio encompasses non-correlating financial assets to hedge against stock market volatility. These assets may be US government bonds (GOVT and IEF), Treasury Inflation-Protected Securities (TIP), Municipal bonds (MUB), Commodities (i.e., GLD, OIL, etc.), and US dollar (UUP).

Establishing a balanced equity portfolio may help to minimize the overall risk during a bear decline. Remember, it is relative rather than absolute performance. Nonetheless, rebalancing an equity portfolio with less beta or less volatile equities will help weather a market downturn, at least from a relative basis.

Growth stocks and over-valued small-cap stocks tend to fall faster and more in a bear market. One investment strategy is to keep the large-cap secular or structural growth names and sells the smaller-cap and the less established growth names. Value stocks can also relatively outperform their growth peers during a market turn. The low P/E ratios names can also offer better earnings stability and relative value under a bear market decline. Defensive names and dividend-yielding stocks will decline less than consumer discretionary names in a weakening economy, and the broad stock market declines.

Bear markets are inevitable. Another bear market is currently in place or on the near horizon. They are part of the overall stock market cycle, alternating between bull markets and trading range markets. However, recoveries are also inevitable. A balanced and hedged portfolio can be your best defense against a bear market. A balanced portfolio of structural growth stocks, value stocks, defensive stocks, dividend-yielding stocks, and hedged financial assets is the best offense to minimize market volatility until the resumption of the secular/structural bull rally.

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

Source: Chart courtesy of

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