Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Beware of Investing in Defensive Stocks!

Stock-Markets / Stock Markets 2010 Jun 26, 2010 - 02:46 AM GMT

By: Sy_Harding

Stock-Markets Best Financial Markets Analysis ArticleJust the thought of a double-dip less than a year after the economy began pulling out of the last recession is agonizing. Just the thought of another bear market in stocks so soon, with the S&P 500 still 30% below its peaks of 2000 and 2007, is unbearable for many.


Illustrating the emotional problem, in a recent e-mail dialog, the well-known anchor of a financial TV show explained to me why he is constantly arguing with analysts trying to warn investors, rather than letting them have their say, why he is trying to present a positive outlook for the market. He said, “My portfolio is still 36% below where it was ten years ago, and I am probably in a state of denial, unable to contemplate the possibility of another lost decade.”

It’s likely that many investors are in the same boat, still scarred by the back-to-back bear markets and hoping if they ignore the present threat that it will go away.

Unfortunately, the unpopular early warnings I have been planting in this column for several months are beginning to bear fruit. In last week’s column I noted that a double-dip is no longer considered crazy talk, but has now become the expectation of a number of credible economists, successful hedge-fund managers, and analysts. The possibility of a double-dip became more obvious in the last two weeks, with reports that retail sales unexpectedly declined in May, while real estate sales collapsed.

The outlook was not improved by the report Friday morning that economic growth in the first quarter, originally reported at 3.2% (down from 5.6% in the fourth quarter of 2009) was revised down to just 2.7%. The consensus forecasts had already been that economic growth will slow in the second half of the year. The downward revision of first quarter GDP, combined with the dismal economic reports for May, will force economists to revise their expectations for the second quarter, which ends next week, and for the rest of the year.

So this week has produced still more evidence that investors need to at least be careful and take protective action to preserve their assets.

Wall Street cannot bring itself to even recommend selling and moving substantially to cash to preserve capital, let alone providing advice on how to make profits in declining markets.

The most common advice for declining markets is to simply hold through whatever comes along. Those who have tried that in the past recognize the folly of attempting it after giving up and bailing out with large losses each time.

Wall Street’s backup advice is to move to defensive stocks, typically defined as companies that pay high dividends, and the big blue chip companies with international operations, and companies with the wind at their backs because even in recessions people still have to eat, drink, and take their medicines. Wall Street says they won’t go down as much as the overall market.

But is losing only 25% or 30% rather than 50% a credible way to handle a bear market?

And even Wall Street’s assurance that such ‘defensive’ stocks will lose less in a bear market is not based on facts. Just look at what happened to Alcoa, Coca-Cola, General Electric, Merck, Bristol Myers Squibb, in fact almost all defensive Dow and S&P 500 stocks, in the last two bear markets. Losses of as much as 65%.

Utility stocks are also often defined as defensive stocks since they typically pay high dividends. But the DJ Utilities Average plunged 61% in the 2000-2002 bear market, and 48% in the 2007-2009 bear market, about the same as the overall market.

Wall Street will have to change its bias if it expects investors to begin to trust its advice again. Constant bullish advice to buy only works in bull markets.

When serious corrections or bear markets threaten, investors need to pay attention and get their heads out of the sand. A good beginning would be to look into ‘inverse’ etf’s and ‘inverse’ mutual funds, which are designed to move up when the market moves down. There are close to a hundred available, each tied to different market indexes and sectors. Inverse etf’s include DOG, EFZ, PSQ. Inverse mutual funds include POTSX, BRPIX, RYURX. There are also leveraged ‘inverse’ etf’s like QID, SDS, DXD, and leveraged inverse mutual funds like URPIX, USPIX, RYTPX, which are leveraged and designed to move up twice as much as the underlying market index or sector moves down.

Making gains in down markets is a much better feeling than simply losing less by buying ‘defensive’ stocks.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in