INVESTMENT STRATEGIES - BEARS AND BULLS - IMPORTANT FROM TODAYS VIEWPOINT

Bears and Bulls.
Source: Hargreaves Lansdown Knowledge Centre
http://www.hargreaveslansdown.co.uk/siteredesign/stockbrokers/frameset.asp?url=15

Bear Market:

1. Choose shares with low Betas less than 1.
2. Select high yield shares with a safe dividend:
• Dividend Cover>1.8
• Gross Dividend Yield above 10-year UK Gilt yield or 10 Year Indian Govt Bond yield
• Stable Profits record extending into the future
• Sizeable Market Capitalisation and well-known name
3. Choose Sectors that historically do well in bear markets:
• Soft drinks companies
• Major pharmaceutical companies
• Food producers
• Major oil companies
• Basic household products companies
• Telephone companies
• Electric utilities
4. Avoid companies with:
• High PE Ratios
• No tangible assets
• No profits
• High levels of Debt
• Non-essential products
5. Avoid sectors with:
• House builders
• Motor vehicles
• Industrial materials/machinery
• Advertising
• Stock market businesses.
6. Select stocks with a good Margin of Safety associated with these Key ratios:
• Market Cap/Sales (PSR) less than 1
• Market Cap/Free Cash Flow less than 5. FCF=Operating Cash Flow less
tax, interest and capital spending.
• Operating Cash Flow greater than Operating Profits
• Enterprise Value/Profit before Interest less than 10. EV=Market cap plus
Debt and minus Cash.
• Market Cap/Tangible Book Value (PTBV) less than 1.
• Gearing less than 25% or net Cash in the bank.
7. Use pound cost averaging or Rupee cost averaging.
8. Look out for the bear market bottom:
• The market will have been trending down on light volume for a year or
more.
• There may have been a dramatic event that produced a final bout of
selling
• Investing in shares will have been unfashionable for some time.
• Sound companies may face absurd rumours
• PE Ratios will be in single figures
• PTBV of the market will be less than the long-term average of 0.65.
9. Signs of a Bear Market:
• Cash is regarded as an undesirable asset
• Value is hard to find. Average PEG will be 1.5+ and few stocks will be
trading at a discount to assets
• Average Dividend Yield will be historically low
• Interest rates will usually be about to rise. Chances of further fall will be
minimal
• Bullish consensus
• Lots of IPOs, and of poor quality
• Ratio of Director buying to selling will have fallen to historically low
levels
• Shares will be failing to respond to good results, implying market
exhaustion
• Exuberance
• When 75%+ of all stocks have been above their long-term averages and
the number of stocks falls below 75%, this is a bearish technical signal
• About 14 months will have elapsed since the last Coppock Indicator
buying signal, during which time the average gain would have been 30%+
• Broad money supply will usually be contracting
• Cyclicals usually do well near the top of bull markets.
10. Stages:
• At the start of a bear market, there is a sharp fall but economic conditions
remain positive.
• Economic conditions deteriorate but the market becomes over-sold.
• This is followed by a sucker’s rally, people believing that the bottom has
been hit
• Economy deteriorates, followed by panic selling
• This phase ends ready for the next bull market when investors abandon all
hope for the future
• The first positive sign is when shares no longer fall on bad news.
• Many new bull markets have started with a major double bottom
formation.
Bull Market:

Signals that lead to a Bull Market are:

1. Capitulation - This refers to the point at which people give-up. True capitulation
involves extremely high volume and sharp declines (oversold stocks). It usually indicates
panic selling. After capitulation, selling takes place. Great bargains exist because
everyone who wanted to get out of a stock for any reason (including forced selling due to
margin calls) has done so. As a result the price reverses or bounces off the lows.

2. Interest rates - Before the bull, rates should be low or at least decreasing. There is
usually an inverse relationship between markets and interest rates. Lower interest rates
spur the borrowing market because companies get money at a cheaper rate. The borrowed
money typically finances expansion, which ultimately leads to higher profits.

3. Realism - Warren Buffet once said, "Investors should be fearful when others are
greedy, and greedy when others are fearful." The final stage of a bull market is ruled by
greed and incredibly high expectations. At the end of a bear market, investors start to
become more rational and realistic, forgetting about the unsustainable high returns to
which they were once accustomed.

4. Inflation - This is the rate at which the general price for goods and services is rising, so
purchasing power is subsequently falling. If inflation is high, the Federal Reserve will
typically battle it by increasing interest rates, which slows spending. Most bull markets
build during periods of low or decreasing inflation.

5. Volume - Watching the number of shares traded on the stock market can be a good
indicator of shifting sentiment. During a bear market, many pensions, funds and other
institutional buyers have large amounts of money sitting as cash on the sidelines. This
money is waiting for an opportunity to get back into the markets.

6. IPO Market - When a bear market is at its worst, very few new companies go public.
IPOs are used to raise money and finance expansion. When companies that have
profitability begin to emerge into the IPO market, it signals improvement in the market.

7. Chartist Signal – the bear market is over when the Indices stay above the 200-day
Moving Average for at least 10 days.