Market InSights:

When does a Bear look like a Bull? (Pt. 1)

Four things to avoid and four things to embrace when the Bear turns into a Bull.


A Bear Rally is a short, swift, updraft in stocks that can end as quickly as it began. Here are the four signals to avoid.

Markets will routinely go through bouts of extreme buying during a bear market. There are several fundamental and technical reasons why markets “rally” at these times amid broader weakness in the market. The market this time has just come off its 4th bear market rally of the 2022 selloff.

Boulder Colorado Investment Management
All Four Bear Rallies

These “false” turnarounds can be frustrating to the casual observer. A feeling that the market is random and chaotic can lead people to become frustrated during these moments of euphoria, only to be quickly rebuffed by another violent selloff.

At some point, these turnarounds stay intact and the Bear market rally is seen for what it is, the beginning of the next bull.

Here are some of the important topics to keep in mind to determine if we are looking at a new Bull, or another Bear.

Markets are Money with Emotion – Bear Rally (4)

If markets were perfectly logical they would be rather dull. If smart people reached the same conclusion regarding the future value of dollars (inflation), corporate revenue (earnings), and cost of capital (debt) then the auction that is the market would see a very narrow band of trading. But, it’s not, there is a maelstrom of emotion that accompanies markets and this market is no exception.

Boulder Colorado Investment Advisor
Bear Market Rally Four

The rally from the June lows, to the most recent selloff, started at the Fed meeting in June and ended in mid-August (Bear Rally 4). The “Dovish Pivot” was the culprit – the belief that a small part of Jerome Powell’s update in June was dovish, and the “feeling” that the rate hiking cycle would come to an end sooner. This was both a fundamental shift in markets and an emotional one. One that we at InSight, didn’t share. We either didn’t hear this new dovishness, or we didn’t believe in it. 

This Bear rally was an abrupt reversal of the trend based on emotion, which you might assume is not a reliable and lasting reason for markets to change course, and you would be right. These good times were quickly brought to an end with more commentary from fed chairs and economists in August and were fully doused by Powell’s speech on September, 21st.

Trading markets on emotions is hard, and for that, we look for momentum to confirm our emotions and use the MACD reading to understand when emotional buying has turned into momentum buying. We try not to fight the momentum in markets.

The “Narrow” rally – Bear Rally (2)

When markets turn around, it happens quickly, and no one wants to “miss out” on the bottom. This causes abrupt buying at symbolic (not fundamental) levels or in single stocks or sectors. Some stocks serve as a bellwether for markets, Trains, Chips, and Logistics companies can tell us when the market is healthy and the supply chain orderly. But when one group of stocks march higher alone, it is likely a false rally and they will routinely be brought back with the border market.

The US Technology Index registered a bear market on March 14 when it closed down 19.8% from its peak on Nov. 22. The index then zipped higher, gaining 17.3% as of March 29 before resuming its downward trend. The index lost 27% between its March 29 close and its June 16 low.

boulder financial planning experts expert portfolio management
Bear Market Rally Two

There was a “buy the dip rally” in a Bull Market for well over a decade. So, traders and investors have been conditioned to buy up markets trading on lows. Markets registering short-term (1 and 3 month lows) have been quickly reversed since the financial crisis.

The great financial crisis ushered in an era of seemingly unlimited accommodation from the Fed and every dip was met with more and more liquidity from investors and the government. Operating in unison, the market drawdowns were short, and bull rallies were profitable.

The Bear Rally (2) of this cycle was met with no such injection from the Fed and the rally petered out when traders ran out of money. This reversal was confirmed as the market headed lower from Bear End (2) into Bear Start (3). A lack of dry powder meant there was less capacity to continue buying up the market. 

There was no confirmation in the rest of the market, and it was proof that while technology is the most important sector in the SP500, it alone cannot fix weaknesses in other market sectors.

Oversold conditions cause “snapbacks” – Bear Rally (1)

Beware of Oversold conditions that cause bear-market rallies. This is also known as a bear trap, a sucker’s rally, or a “dead cat bounce.” Frequently bottoms are found when conditions on the Relative Strength Index (RSI) reads “oversold” so traders and investors misinterpret these as bottoms, especially early in a bear market. The Bear Rally (1) is a good example of this:

Boulder Colorado Investment Management
Bear Market Rally One

A phenomenon in bear market rallies is the snapback or dead-back bounce. When stock prices deteriorate so quickly, the oversold conditions are met, and the traders look to profit off the short-lived really to come. Oversold conditions are routinely bought up quickly – but they are quickly reversed when the longer trend catches up with the short-term trend. Oversold, or overbought conditions are usually reached when a chart favors the bias of a daily trend over a weekly trend. 

Rallies based on “oversold” conditions very rarely last longer than a couple of weeks. 6-15 trading days at the most, before the more powerful long-term trend, exerts its pressure over the short term.

More related articles:

Boulder Financial Planning Experts
Kevin Taylor

How to draft an Investment Policy Statement?

Define the investment objectives: The first step in drafting an IPS is to define the investment objectives. This involves assessing the risk tolerance of the trust or family office and determining the desired return. Establish the asset allocation: Once the investment objectives are defined, the asset allocation strategy can be established. This involves determining the proportion of assets allocated to each asset class based on the investment objectives and risk tolerance. Develop the risk management strategy: The risk management strategy should be developed based on the investment objectives and the risk tolerance of the trust or family office. The strategy should define how risks will be managed, monitored, and evaluated. Establish the roles and responsibilities: The IPS should establish the roles and responsibilities of the investors, fiduciaries, and investment managers. It should define who is responsible for making investment decisions, monitoring the portfolio, and evaluating performance. Evaluate performance: The IPS should include a performance evaluation process that assesses the performance of the investment portfolio relative to the investment objectives. The evaluation should be conducted regularly and used to make adjustments to the investment strategy.

Read More »
Kevin Taylor

What should I know about Bitcoin?

Let me be clear from the beginning, there is a demand for a stable value, inflation-resistant currency in the world. It’s not Bitcoin.  Bitcoin might be the first through the door, it may revolutionize the zeitgeist ways we discuss the usage of currency and it might be an early aid in getting people around the world out of using their destabilized local currencies. But it will more likely be the myspace of currencies.  Inflation Hedge: Bitcoin can be a store of value  Bullish Bitcoin advocates have routinely promoted the digital coin as a reliable store of value.  They are convinced the digital currency can be a store of value assets like, commodities, or currencies that maintain their value. So many of these advocates see bitcoin as an “inflation hedge.” And while it might be, I think there is a far greater concern that it outpaced any reasonable amount of hedging it was capable of. In 2020 inflation on the CPI was 2.3%, arguing that the buying power of U.S. dollars shrunk by 2.3%, but the bitcoin rose 66%. I would contend that while a small portion of the change was the result of inflation, the other 63.7% was pure speculation. Let’s look at other stores of value, say copper. When the price of copper increases by say 6% in a year, the first 2.3% can reliably be because the buying power of cash deteriorated in comparison to copper over the course of the year.  The 3.7% delta is due to increased demand for copper usually as a result of its utility. Thus, the increase is driven by underlying market functions for copper. I think the same argument should be made for bitcoin, that the first amount it increases in value is the result of inflation and the second is the result of speculation on inflation. The speculation element is almost 29 times higher than the inflation rate in 2020. I think with that ratio of inflation hedging capacity to speculation being so wide it cannot be a reliable replacement for traditional inflation hedges. Let’s then add a more practical element, Bitcoin fever is not the honest result of people hedging their inflation bets. I don’t believe most of them are concerned about the pace of inflation that they can justify a 66% run-up as a concern for the Federal Reserves’ buying rate. It’s more likely the result of seeking a high return on assets. This is then where I am truly concerned about Bitcoin (or any cryptocurrency) being considered a store of value. Let’s then take a look at the utility of Bitcoin. Some of the value of other stores of value is that they have an intrinsic utility. Arguably, they were a reliable “store of value” before they were thought of that way by markets. Since the dawn of commerce, traders have used precious metals and industrial metals to store value. They have a legacy of usefulness. Gold was made into jewelry early, then coinage, then dentistry, and now it’s mission-critical in aerospace and technology. It has always had a drop-dead value because of its innate function. So if you were worried about the governing power that developed a currency, in 700BC or 2021, dropping to zero, the store of value would still have some intrinsic usefulness. I’m not sure the same could be said for bitcoin, because unlike other commodities and precious metals I can’t make a house with it, mold it into utensils, or wear it around my neck. Bitcoins value without its relationship to other currencies is $0. Market Hedge: Bitcoin can hold value when markets fall For this, I think it’s important to look at the behaviors of the people who are buying both the market and the underlying fundamentals of each. I think that it is true, that both the market and Bitcoins are inflation-hedged assets. Only one of these makes sense over time. Additionally, we look at the correlation of the greater market to Bitcoin. In terms of volatility, like March of 2020, we saw equity high volatility in Bitcoin. In times of expansion, we see similar directionality. I think a greater, more lasting argument can be made that Bitcoin’s success and the success of the market are the results of the same underlying causes of liquidity. As we generate more money in the world, the price of assets rises, this shouldn’t be a shock. What does become a point of distinction between the two is that while Bitcoin can arguably “inflate” as long as the de facto Crypto is still Bitcoin. What it cannot do, is provide the investor cash flow in the future. The market however is the representation of ownership over future cash flows. So when markets “sell-off” there is a bottom-rung where the price of future earnings is too appealing and recruits investors back to the marketplace. With no such promise of future cash flows from bitcoin, what becomes the bottom rung? For most commodities, it becomes its intrinsic value, for Bitcoin that is $0.  Fixed Asset: “Bitcoin is a fixed amount and there will never be more” This is kind of an illusion. Yes, there will be a fixed amount of Bitcoins, but not a fixed amount of cryptocurrencies. Each currency type will have its own value, function, and framework. So if in the infinitely expansive ecosystem of “coinage” something comes along that can supplant the “fixed” appeal of bitcoin, and have some other benefit, the appeal of Bitcoin erodes overnight. Say for example a “fixed amount currency”, more granular than bitcoin, or fixed amount and acceptable in Costco whatever the case is, becomes the Bitcoin+ currency of choice.  Then it becomes a question of “How long will people accept my bitcoin?” and then it’s a run for the door trying to not be the last person holding a tulip. The race will become how many Bitcoin+ will I be able to exchange for my Bitcoin. So the argument that it’s “digital gold” is valid until there

Read More »
Peter Locke

Divorcing Women and their Unheard Financial Goals

Financial problems are one of the most cited causes of divorce and crafting a Divorce Financial Plan can be your best opportunity for a new start. The compounding stresses of money management and home economics can act as an accelerant for the underlying causes of marital strife and ultimately divorce. It should also come as no surprise that divorce often results in a change in financial direction for both parties, who through the process of divorce find they have several financial goals and needs that are not part of the current marital financial plan. So for one of the parties, it’s time for a change in the methods, tools, and priorities addressed in the financial plan.  On the heels of a divorce, here are some of the most commonly shared priorities that went unaddressed in prior relationships with investment professionals and financial advisors: 66% Hope to pay off debt accrued in or before the divorce 41% Want to save for a comfortable retirement 38% Would like to start or have a  larger emergency fund 34% Would like less risky investments 27% Would like a new home 20% Want more new streams of reliable income 19% Are hoping to build their wealth through investments 12% Want to gain confidence in their insurance  We feel that most of the divergence between the goals of these surveyed divorcees and their financial plans started long before the divorce proceedings. The disconnect between the financial goals of a single party and those established in a marital financial plan likely existed well before the topic of divorce arose and stems from a lack of communication and shared vision.   A staggering majority of recently divorced women comment that their post-divorce financial plan looks nothing like their marital financial plan. Furthermore, an alarming number of women developing a financial plan reveal that they have not yet discussed these priorities with a financial professional which begs the question of how a financial plan that fails to uncover the goals and needs of the woman became enshrined in the first place. As a result, many don’t have a clear path on how to achieve their stated financial goals.  These unheard financial goals compound the already frustrating and stressful situation a divorce brings.  A Certified Divorce Financial Analyst® or CDFA® can play a significant role when uncovering the value of shared assets, divining a tax-based strategy for the future value of different investment types, and assisting in dividing marital assets during the divorce process. Additionally, a CFP® professional can assist you in understanding your options, documenting your financial goals, and putting you in the best position possible to help you achieve your financial goals post-divorce. Generally speaking, women live longer, have different expectations for their money, and prioritize investment returns and strategies. As such, their financial plans should be developed differently. Having a financial advisor by their side during divorce is crucial for combining their long-term financial planning expectations with their current asset make-up. If from the outset, a divorcee lays out a road map for their financial life, the advisor and attorney can better negotiate the terms of the settlement for their shared client. However, in a 2018 survey by the publication Worthy survey, 56% of women getting a divorce, discussed the marital house and debt as a priority, but only 48% discussed taxes, 34% discussed alimony, and 39% discussed the ongoing cost of child care. All of these have a more impactful weight on the long-term success of retirement and the border financial plan.  This makes working with a CDFA® and CERTIFIED FINANCIAL PLANNER™ even more crucial when facing a divorce. A financial professional can help you overcome emotional turmoil to bring you the financial vision and stability you deserve after divorce. The Complete Playbook

Read More »

Pin It on Pinterest