Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20
The Growing Weaponization of Space - 14th Feb 20
Will the 2020s Be Good or Bad for the Gold Market? - 14th Feb 20
Predictive Modeling Suggests Gold Price Will Break Above $1650 Within 15~30 Days - 14th Feb 20
UK Coronavirus COVID-19 Infections and Deaths Trend Forecast 2020 - 14th Feb 20
Coronavirus, Powell and Gold - 14th Feb 20
How the Corona Virus is Affecting Global Stock Markets - 14th Feb 20
British Pound GBP Trend and Elliott Wave Analysis - 13th Feb 20
Owning and Driving a Land Rover Discovery Sport in 2020 - 2 YEAR Review - 13th Feb 20
Shipping Rates Plunge, Commodities and Stocks May Follow - 13th Feb 20
Powell says Fed will aggressively use QE to fight next recession - 13th Feb 20
PALLADIUM - THIS Is What a Run on the Bank for Precious Metals Looks Like… - 13th Feb 20
Bitcoin: "Is it too late to get in?" Get Answers Now - 13th Feb 20
China Coronavirus Infections Soar by 1/3rd to 60,000, Deaths Jump to 1,367 - 13th Feb 20
Crude Oil Price Action – Like a Coiled Spring Already? - 13th Feb 20
China Under Reporting Coronavirus COVID-19 Infections, Africa and South America Hidden Outbreaks - 12th Feb 20
Will USD X Decline About to Trigger Precious Metals Rally - 12th Feb 20
Copper Market is a Coiled Spring - 12th Feb 20
Dow Theory Stock Market Warning from the Utilities Index - 12th Feb 20
How to Get Virgin Media Engineers to FIX Hub 3.0 Problems and NOT BS Customers - 12th Feb 20
China Under Reporting Coronavirus COVID-19 Infections by 66% Due to Capacity Constraints - 12th Feb 20
Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? - 12th Feb 20
Stock Market 2020 – A Close Look At What To Expect - 12th Feb 20
IBM AI Mega-trend Tech Stocks Investing 2020 - 11th Feb 20
The US Dollar’s Subtle Message for Gold - 11th Feb 20
What All To Do Before Opening A Bank Account For Your Business - 11th Feb 20
How and When to Enter Day Trades & Swing Trade For Maximum Gains - 11th Feb 20
The Great Stock Market Dichotomy - 11th Feb 20
Stock Market Sector Rotation Should Peak Within 60+ Days – Part II - 11th Feb 20
CoronaVirus Pandemic Stocks Bear Market Risk 2020? - Video - 11th Feb 20
Facebook (FB) AI Mega-trend Tech Stocks Investing 2020 - 10th Feb 20
The US Constitution IS the Crisis - 10th Feb 20
Stock Market Correction Continues - 10th Feb 20
Useful Tips for Becoming a Better Man - 10th Feb 20
Will CoronaVirus Pandemic Trigger a Stocks Bear Market 2020? Part1 - 9th Feb 20
Could Silver Break-out like it did in 2011? - 9th Feb 20
The End of the Global Economy - 9th Feb 20
Fed to Stimulate in Any Crisis; Don’t Let Short-Term Events Bother You - 9th Feb 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

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, and the free daily market blog,

© 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.

© 2005-2019 - 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

6 Critical Money Making Rules