Here’s how to tell a bear market is coming

https://www.cnbc.com/2020/02/22/heres-how-to-tell-a-bear-market-is-coming.html

This is an interesting article. I'm not sure how useful it is. But the best technique in my opinion is still to look at charts. It is not that I don't respect fundamentals and valuations. I use fundamental valuation techniques to decide what stock to buy, what funds to buy or sell. But I use technicals to time my entry and exit.

Here are the excerpts that may prove useful.

 "The list of 19 signals ranges from fundamental to sentiment-related indicators and uses data tracking back more than 50 years.

Currently 63% of the bear market signposts have been triggered, up from 47% in January. Since 1968, when 80% of the indicators are triggered, a bear market occurred, meaning stocks fell 20% from their most recent highs."

"Here’s a full list of the bear market indicators from Bank of America:

1. Federal Reserve raising interest rates 
2. Tightening credit conditions 
3. Minimum returns in the last 12 months of a bull market have been 11% 
4. Minimum returns in the last 24 months of a bull market have been 30% 
5. Low quality stocks outperform high quality stocks (over six months) 
6. Momentum stocks outperforming (over six to 12 months) 
7. Growth stocks outperforming (over six to 12 months)
8. 5% pullback in stocks over the last year
9. Stocks with low price-to-earnings ratio underperform 
10. Conference Board’s consumer confidence level has not hit 100 within 24 months
11. Conference Board’s percentage expecting stocks go higher
12. Lack of reward for earnings beats 
13. Sell side indicator, a contrarian measure of sell side equity optimism
14. Bank of America Fund Manger Survey shows high levels of cash 
15. Inverted yield curve 
16. Change in long-term growth expectations 
17. Rule of 20, trailing price-to-earnings ratio added to CPI is above 20
18. Volatility index spikes over 20 at some point within the last 3 months
19. Earnings estimate revisions rule

How do We Know a Bear Market Has Begun?

First, look at the red line, which is the 150 days moving average. When it is sloping up, the general stock market is on the rise. This is the ETF for MSCI World Index BTW. It is a market-cap weighted index of major stock markets around the world. The 50 days is above the 150 days. The 20 days is above 40. All systems are going. 

Now notice that the optimum place to buy is when when the price touches the 50 days, or better still the 150 days moving averages. I know it is rare, especially to buy at the 150 days. But we need to be patient. 

If the 150 days is sloping down, the 50 days is below the 150 days, and the stock price is below both averages, we probably have a bear market and should consider selling our stocks.

Another method, which I use is the monthly MACD. Now let's test how useful this indicator is. It is not perfect, make no mistake but it allows you to capture almost all the upside and downside.

Jan 2012: BUY at 51.25
Oct 2014: SELL at 71.10. Return 38.7%.
Sep 2016: BUY at 72.45. Return -1.9%
Oct 2018: SELL at 85.89. Return 18.6%
Sep 2019: BUY at 92.07. Return -7.2%.
NOW: 100.89. Return so far 9.6%.

Based on this technique, the return is 38.7% - 1.9% + 18.6% - 7.2% + 9.6% = 57.8% from Jan 2012 to Feb 2020. That's 5.87% per year or 57.8% over 8 years.

Now this is by no means the greatest indicator. 5.9% isn't great. But it allows you to potentially make money in a down market because you have the capability to short when the indicator turns down.

Notice that in a bull run, you tend to lose money like between Oct 14 to Sep 16 -1.9% and Oct 18 to Sep 19, -7.2%. But in a really big bear market, like in Sep 07 to Feb 09, you will make between 20 - 40% return.

A long-short strategy is unlikely to beat a long only strategy in a bull run. Notice that if you had held the ETF from Jan 12 to now, you would have bought it at 51.25 and it is now 100.89. That's 8.8% per year. But when a crash comes, the long-short strategy tends to work better. Another tip is to have a combination of the monthly MACD and weekly ones to capture a larger part of the trend. It also means that you may need to trade a little more.

Now let's try another indicator. It is called the 50 vs 150 days moving average. When the 50 days MA > 150 days, it is called the "Golden Cross" and you go "LONG". When the 50 days < 150 days, it is called a "Dead Cross" and you go "SHORT".

50 v 150 days	Action	Price	Return
Mar-12	BUY	52.51
Oct-14	SELL	68.42	30.30%
Mar-15	BUY	74.79	-9.31%
Aug-15	SELL	72.95	-2.46%
Apr-16	BUY	70.99	2.69%
May-18	SELL	90.14	26.98%
Jun-18	BUY	90.75	-0.68%
Nov-18	SELL	86.28	-4.93%
Mar-19	BUY	88.69	-2.79%
Feb-20		100.89	13.76%
			53.55%

You will find that the return is slightly inferior to using the monthly MACD and the number of trades is higher, at 9 vs 5 for the MACD monthly method. The return was 5.51% per year.