“In a bear market, whoever sells first, wins.”

Ken Norquay recalls the late Richard Russell’s admonition in making the case that investors who have not adopted financial plans that include selling, should do so immediately.


Chartered Market Technician (CMT) and author Ken Norquay warns “withstanding bear markets is a very emotional experience”.

I remember those carefree childhood times that led up to the ‘back to school’ days of September. Time, somehow, moved slower then. As investors, we too sometimes become confused by our perception of time. Market trends can change ever so slowly, or suddenly, all at once. Consider, for example, the time it takes for a stock market uptrend to give way to a downtrend. Market tops are usually long, drawn out affairs. Time seems to stand still as investors experience what children experience as summer slowly gives way to autumn.

Is that all there is to it? Market tops take a long time to unfold. Is that it? No, it’s not about how much time it actually takes the market to change its trend; it’s about how we perceive that time. When we were kids, August was usually a worry-free month. Our minds were relatively stress free and we perceived time as progressing slowly. Once we went back to school, time sped up again because our schedule was busier, and we had more responsibility and more concerns. It’s the state of our minds that causes us to perceive time as moving fast or slow.

Market tops make complacent investors

At market tops, the overriding state of investors’ minds is complacency. Investors see the lack of market progress, but aren’t really concerned. This is the relaxed state of mind that makes us perceive time at market tops like a school kid perceives time in August.

Let us jolt our perception of relaxed time by examining a variety of financial market trends from the cold hard view of statistics: we’ll count the days and the dollars and leave our carefree summer days behind.

US stock market

Our topping scenario for the S&P500 has been this: the orthodox top occurred on January 26, 2018 at 2,873 and we were waiting patiently for the nominal high, having observed the first portion of a five-point reversal pattern. The nominal high finally occurred on July 26, 2019, exactly 18 months after the orthodox top when the S&P500 reached 3,028. The bear market has finally begun. The long- term trend is down.

Canadian stock market

The orthodox high occurred on January 4, 2018 (TSX Comp 16,421) and the nominal high arrived 15 months later, on April 23, 2019 (TSX Comp 16,673). The long term trend is down.

Investors who continue to hold stocks during this bear market will not perceive time as a long, lazy summer vacation: for them it will be full of emotion and the intense focus on one economic news item after another. Those who have sold out and are waiting for the bottom will experience time like our school kid in August, wondering when the return to a market uptrend will finally occur.

US bond market

In August, there was a spectacular short-term upsurge in long-term bonds. Bond prices went to a new high, eclipsing the July 2016 level, made 3 years 2 weeks earlier. This up-surge in bond prices (surge down in interest rates) accompanied August’s sharp drop in the stock market.

The financial media interpreted these events as a warning that the economy was slipping into a recession. Some commentators theorized that American interest rates could go negative: i.e. investors would have to pay to hold treasury bills. Crazy times have come to the normally boring bond market. There’s no complacency here now. Although long-term bond prices registered a new multi-decade high in August, the long-term trend is still neutral. Since the banking crisis of 2008, the US bond market has been fluctuating dramatically, barely trending.

Canadian bond market

Though Canadian bonds took the same direction as US bonds, the extent of the moves has been different. As a result, the multi-decade high in Canadian bonds was significant, whereas in the US it was minor. The Canadian economy is weaker than the American and needs more stimulation in the form of lower interest rates. For this reason, it is more likely that Canada, not the US, will experience negative interest rates.

Although we currently rate long-term Canadian interest rates as neutral, there is a possibility that we are witnessing the resumption of the down trend that began in 1981. We should know within a year. Canadian long-term interest rates, like their US counterpart, are neutral; trendless.

US dollar vs basket of non-US currencies

In March 2015, the US dollar hit 100; now, over four years later, it is 98. That’s neutral. The only interesting feature is its slight uptrend so far this year. More on that when we discuss gold prices below.

Canadian dollar vs US dollar

The long-term trend of the loonie has been neutral since the oil-related low in January 2016.

Gold vs US dollar

Gold prices reached their high (above $1,900 per oz) in 2011 and declined into 2015 (below $1,100 per oz). Then, gold rallied sharply for 10 months, and lapsed into a long, neutral phase that lasted until June 2019, when the uptrend began anew. The long-term trend is up.

In the short term, gold has been trending up for most of this year. At the same time, the US dollar has been rising slightly vs the basket of non-US currencies. This means that the gold rally is ‘for real’, not just a reaction to a declining US dollar. The US dollar inched forward and gold surged forward. This is very encouraging for gold bugs.

Be cautious about participating in gold’s uptrend by buying gold mining stocks. In the early stages of the 2007-9 bear market, gold stocks did very well. The same thing is happening now. But, in 2008, when the overall bear market became more widely recognized, gold mining stocks collapsed too. Long term investors can buy gold coins, bullion, bullion funds or ETFs; gold mining stocks are for traders.

Energy prices

Oil has been in an up trend since the February 2016 low. The bottom was followed by a 4 month rally; then a 16 month neutral trend; then a one year rally into autumn 2018; then a 3 month crash; then a sharp rally; then a drop to current levels. Get the picture? There is plenty of action in these short-term swings, but not in the long-term trend. Statistically, the trend has been slightly up since the February 2016 low, but the market is now characterized more by volatile swings than by trend.

Consider the TSX Energy Index. It’s been in a long term downtrend since 2008. Yes, there have been big short-term up trends within the past 11 years, but the index hit a new low in August. This index has been in a downtrend right through the longest bull market in US history. It’s been a drag on the Canadian stock market and the Canadian economy. But, still, portfolio managers who believe in diversification or indexing feel they have to include energy stocks in their holdings. Those who ‘hold for the long term’ have felt the sting of underperformance because of this down trend. It’s important to sell investments in a down trend. Diversification will not protect you from a loss in a long-term bear market. Selling your down-trending investments is the only escape.

Volatility looms

The late Richard Russell, author of America’s longest standing market letter (Dow Theory Letters, 1958 to 2015) had a saying that is very useful to investors right now: “In a bear market, whoever sells first, wins.” With the nominal stock market top in both Canada and the USA only a few months behind us, we are still in the early stages of this long-term downtrend. The biggest psychological trap during the next few years of market decline will be the belief that “it’s too late to sell”. Investors who have not yet adopted financial plans that include selling should do so immediately. Right now, late in 2019, is not ‘too late’.

Those who do include selling in their investment planning should remember that withstanding bear markets is a very emotional experience. Many volatile rebounds can occur in a long-term decline. If you buy back into the market too early, and find yourself losing money, get back out immediately. Volatile, emotional times are ahead. Keep your eye on your long-term reasons for buying and selling. The most important principle in the next few years will be this—avoid loss.

Ken Norquay, CMT, is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: behavioural finance. He can be reached at kennorquay@yahoo.ca.

This is an edited version of an article that was originally published for subscribers in the September 2019/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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