On December 13, 2007 I had a blog post titled Send In The Bears? where I said I felt a bear market has started. The idea there was a generally deteriorating market combined with several macro factors that you can read about if you are so inclined.
At this point it is early to know whether a bear market has started, calling one early is generally unnecessary if you believe, as I do, that actual bear markets start slowly giving plenty of time to get out. As disclosed earlier this week we have started defensive action consistent with the SPX breaching its 200 DMA but if this is a bear market, I don't believe there is urgency to go 50% cash this week as some media outlet have or will imply.
[Related -Why I'm Eyeing Airline Stocks]
One contributing indicator is something called the 2% rule which I have referred to many times and that I learned about in my short time working at Fisher Investments quite a few years ago. In a nutshell the 2% rule says that a bear market has started if the benchmark averages a 2% decline three months in a row. The market is heading in the direction being two months from its peak but two months is not three months.
I will be paying close attention and would expect to get more aggressive with defensive trades should the 2% rule come into play.
[Related -ETF Periscope: Sentiment On Main Street At Odds With Jubilation On Wall Street]
Yesterday we initiated defensive action in so called mid sized accounts where we use mostly sector ETFs. Most of these accounts own the Industrial Sector SPDR (XLI) at what had been about a market neutral weight. With yesterday's partial sale we cut the exposure to the sector in half.
One aspect of this site is to allow anyone who is interested to look at the thought process as it unfolds which is the ground covered above.