Romulus Report: The Bulls, the Bears, and 2022

MARKET Watch

It is 2022. It is time we had the talk. You know, the B’s and the B’s. No, not that talk. Today, we are going to talk about the bulls and the bears.

There is no single, direct application of these terms. Wall Street has always been colorful in its use of acronyms and nicknames to describe trading actions or define market attributes. A few of the current favorites are FOMO, or fear of missing out, and FAANG, an acronym used to discuss the biggest tech stocks Facebook, Apple, Amazon, Netflix and Google.

Nothing, however, goes back as far, or holds as much sway as the words bull and bear. There is a fair amount of urban myth surrounding the origins of these words in relation to trading, but it seems both have their roots in England during the early days of the South Sea Bubble, or roughly 300 years ago. The practice of trading stocks has been around for thousands of years, but 15th and 16th century Europe is when it began to resemble something we would recognize in our modern time.

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Hunters would sometimes sell the skin of the bear before they actually killed the bear. In the South Sea Bubble, this was translated to describe shorting, which is how traders can profit when stocks fall. As the word bear become associated with periods of falling South Sea stock, traders wanted a catchy word to describe a rising market. Gladiator games were long gone by then, but it was common to watch bears and bulls get slaughtered by dogs in arenas. So, bull it was.

There is another explanation as to why we use the bear and the bull, and this one makes a little more sense. When a bear attacks, it is standing upright with its dangerous paws high in the air, then swipes down for the kill. A bull begins his charge with his horns lowered and raises them up for the goring. Down goes the bear, up goes the bull.

Stocks can do one of three things: rise, fall or go sideways. A person who believes stocks will go up is said to be bullish. Someone who doesn’t see the upside prospects of Bitcoin, for example, can be called a crypto bear. The financial media likes to say that stocks are in a bear market as soon as they fall 20% from a recent high. A bull market is simply an asset that has been going up for a while.

It is easy to make money in a bull market. Everyone does it. If you buy something at the wrong time it is usually not long before the bull market bails you out and you are profitable again. People maintain a positive (or bullish) bias during these times and it is generally believed that stocks will maintain their upward slope for many more years.

“Abandon all hope, ye who enter here.” This is a quote from the opening of Dante Alighieri’s timeless poem, Inferno. This is the perfect way to describe a bear market. I don’t agree with the common understanding that a bear market is anything that has dropped 20% from a recent high. From July to October 2011, the S&P 500 fell 19.5%, only to reclaim the former highs six months later. That nasty correction in late 2018 took the S&P down almost 20%, but new highs were seen just seven months after the September top. Even the crash of 1987 (one of only three real crashes in the American market over the last 100 years) saw stocks at new highs in 11 months.

I believe bear markets must be defined using both price and time. I successfully traded through the only two bear markets on this century, the dotcom crash and the financial crisis. It took more than seven years after the peak of the dotcom mania for the S&P to reclaim its former highs, and it was over five years after the credit peak of 2007. The Dow Jones Industrial Average first popped over 1,000 in 1968, but didn’t move permanently above it until 1982! The Japanese stock market reached 39,000 in January 1991, and it is trading at 28,000 today.

Bear markets are demoralizing. They are gut wrenching. They feel like they will never end. We haven’t seen a bear market in the US in 13 years.

I am bringing this up because I want to express my feeling that people should be careful about throwing the words “crash” and “bear” around too loosely. It can lead you to a mindset that can be difficult to get away from. Since the first brokers started trading under the button wood tree in New York City in 1792, U.S. stocks have spent two thirds of the time in bull mode. There is a bullish bias toward American stocks, and that underscores much of the trading action you see on a daily and monthly basis.

I am not a perma-bull. I recognize that many problems face America (massive debt being one of the most dangerous) could bring about a prolonged period of stock market losses (a bear market). But I have to deal with the facts and the statistical odds that those facts reveal. Several weeks, and normally months, of deterioration take place before major tops set in. It must be remembered that even after this latest bout of selling, the S&P 500 has not experienced a correction of more than 6% in 14 months. It is due. But that doesn't mean a bear market is upon us when it happens.

It does mean, though, that this is a good time to lay low and wait. If a post-Covid, roaring twenties era is around the corner, we will see it in the trading behavior with enough time to participate in a meaningful way. If, on the other hand, the market wants to quit the scene for the next few years, we will have time over the next two months to prepare for that.

One of the most important traits is to understand what you can really expect from trading and investing. The American stock market has averaged around 11% a year for the last 125 years, with dividends. The world’s largest institutions would be thrilled to make 13% a year. I believe we can do better than this because we are small and nimble, but it is totally unrealistic to think you can double or triple your money every year. There isn’t a trader or investor in the entire world who does that on a consistent basis. My goal is 25% a year. I know a few traders who make 40-45% a year (they take more risk than I am comfortable with), but only a few. A realistic set of expectations keeps me grounded during times of market turbulence.

Another tactic is my every day eating, sleeping and exercise routine. Emotions are often heightened when the physical body is out of whack. I spend a lot of time making sure I get this part of the equation right.

I live by a simple code. Every person should live by a code. What are your beliefs, values, morals and ethics? Pick something and stick with it.

Prayer and meditation are a big part of my life. I have a strong faith and I believe the focus that comes from mediation can be life changing.

The last piece is discipline and patience. It doesn’t always pay to be a disciplined investor, but it does most of the time. 2022 will be the year of discipline.

As Warren Buffet said, there are no called strikes in investing. We can wait for the perfect pitch. Extreme overbought or oversold situations, combined with positive or negative divergences. These conditions will present themselves many times next year, but we have to make sure we are in the proper position to take advantage of them. Staying patient and maintaining discipline will bring us much closer to our investing goals for next year.

My advice to investors and traders is "keep your head while those about you lose theirs." That is emotional balance.

This is the first Romulus Report for 2021. I am grateful for the opportunity to bring you thoughts and ideas that can help you and your family improve your financial lives. 2021 was a great year, but I know 2022 will be even better!

Wealth, like Rome, cannot be built in a day. But, like Rome, it can be lost in a day. Watch for future announcements from Romulus about profitable market moves, important indicators, and major market swings. For trading education, mentoring, or to beat the markets with Romulus' trading group, contact romulus@groktrade.com or go t0 www.groktrade.com/romulus.