Stock Investing Tips

A bear market is when the stock market is down 20% from its highs. Not only has 2008 been a bear market, the last two months have in of themselves been a bear market.

The economic slowdown caused by the housing collapse and credit crisis has spready worldwide. At first, 2008 looked to be a commodities bull market. Oil went over $140 a gallon and commodity stocks like Freeport-McMoRan Copper & Gold (FCX) and Potash (POT) recorded huge gains.

Then, the full effects of the economic slowdown on global demand for commodities kicked in and commodites plunged. Freeport McMoran is down almost 70% over the last 3 months, and the price of oil has been slashed by over 50%.

The election brought a severe drop in stocks as well. Most believed that the market fully anticipated an Obama victory, but stocks still plunged 10% in the two days after his election. The day after, this past Friday, stocks managed to regain some of those losses with about a 3% rally.

Bear markets is what separates the men from the boys. Many investors have been killed by margin calls and speculations that went south. The CEO and founder of Chesapeke Energy Corporation (CHK) was forced to sell a significant amount of his holding in the company due to a margin call. While it is in a way reassuring that the CEO believed so much in his company that he bought stock on margin, it greatly hurt him and investors in the company when he was forced to sell a large chunk of his holdings to meet a margin call.

As bad as 2008 has been with the S&P 500 down about 37%, the year still isn’t over. If the year ended today, it would be the worse year since the Great Depression. The only two worse years were 1931, when the market lost 52.7% and 1907, when it dropped 37.7%. For us to get back to only the second worse year since the Great Depression, we’d have to beat 1974’s brutal returns of -29.7%. Hey, if we managed that, we’d have a nice little year-end rally from here on out!