Market Roundup
Dow +228.89 to 16,599.85
S&P +25.06 to 1,978.09
NASDAQ +54.76 to 4,860.52
10-YR Yield +0.10 to 2.28
Gold -3.50 to 1,104.00
Oil +0.65 to 44.65

The markets are flopping and chopping wildly here – up or down hundreds of Dow points every few days. The obvious reason: Everyone is waiting for the Federal Reserve’s “oracles” to come down from on high and tell us what the future holds for interest rates, but they’re driving stocks to and fro as they place their bets in anticipation.

But what if … just IF … we’re already in a new bear market? What if it literally doesn’t matter what the Fed does or says this week, and stocks are going to drop anyway?

It seems like heresy to suggest such a thing — especially after today’s rise. And after all, many Wall Street investors have been lulled to sleep by six-and-a-half-years of funny money. They’ve grown complacent – convinced that an ever-present “Fed put” will save them no matter what.

But I believe I’ve laid out a convincing case that Janet Yellen and her ilk can’t keep the balls in the air much longer. Multiple rate cuts, QE announcements, and other easing steps overseas haven’t stopped markets from weakening anyway. Plus, the technicals, fundamentals and economic backdrop all argue for lower stock prices.

Despite occasional bounce-backs, are we actually in a bear market?

If I’m right, that means you’re going to have to dust off the old bear market playbook – one that many investors have all but forgotten! Some key playbook pointers to get you started:

● In bear markets, you can find a select few stocks with stable businesses, generous yields, company-specific catalysts, and high ratings that will outperform or generate gains. But they’re much fewer and farther between.

That means you need to maintain much higher levels of cash. It also means you can’t just buy any old ETF or big-name stock — or listen to tired Wall Street “buy and hold” advice — and expect to make money. You have to get extremely selective. Or better yet, you want to find someone with a lot of experience predicting past bear markets, and trading their way through them.

● In bear markets, long, grinding moves lower … and a few interim mini-crashes mixed in … are the norm. Equally normal are furious, short-term, short-covering rallies that suck people into thinking everything is fixed.

Go back to the 2000-02 and 2007-09 bear markets, and that’s precisely what you’ll see – and of course, it’s what we’ve been seeing for the past several weeks. So if you’re a more conservative investor, you should take advantage of those short-term rallies to lighten up dramatically – and wait for nasty spikes lower to add the few cheap, high-quality stocks you want to stick with no matter what.

● What if you’re a more aggressive investor? Then forget about “buying low and selling high.” You want to “short high and cover low.” In other words, take advantage of countertrend rallies to sell stocks short, buy put options, or add inverse ETFs – strategies and instruments that rise in value as stocks fall.

“In bear markets, you can find a select few stocks with stable businesses.”

I’m fully aware these strategies aren’t popular among the conventional Wall Street crowd. I know they haven’t worked for more than short periods of time over the last six-and-a-half years. I can’t tell you precisely what the Yellen Fed will say on Thursday, or how markets will react in the very short term thereafter.

But I do believe the big picture outlook is more challenging for stocks now than it has been at any point since 2007. Consequently, I believe the possibility we are now stumbling back into bear market territory is the highest it has been in several years. So I want you to be prepared and ready to take even more steps than I’ve already suggested if we get more confirmation the bear truly is back.

So what do you think? Is it time to dust off the bear market playbook? Or is it too soon to make that dramatic of a shift? What about this week’s meeting? Can the Yellen Fed take back control of the market, or is the market spinning off its axis as I suggested recently? Let me hear about it over at the Money and Markets website.

Our Readers Speak

While waiting to see what happens with Federal Reserve policy and how markets react, you took some time to comment on the other big news items out there – namely, China, the Middle East, and Europe.

Reader W. said he thinks China is trying to get on the right track with regards to its economy. His view: “I think the world is in the midst of paying for its arrogance. But China has learned its lesson and is changing for the better. Many have been arrested and changes made.”

But Reader Fred 151 countered: “I don’t know about that. China is invading the offices of investment companies and businesses to take records to see who has sold stocks. If you have sold a stock, you could be in big trouble and could be prison bound. Now think of that: Would you be likely to ever buy another stock? Not me!

“I think they are (once again) shooting themselves in the proverbial foot by scaring the heck out of all their investors. The Chinese have not learned squat, in my opinion.”

Meanwhile, Reader Richard offered this take on the migration boom in Europe: “The refugee problem that Europe has is the tip of the iceberg. Unless someone can stop ISIS, it will only get worse.

“The West had better wake up soon and work out ways to stop the never-ending supply of ammunition, and seemingly endless supply of Toyota trucks, that the terrorists like to run around in. The West seems to be burying its head in the sand, and pretending it is not their problem. Maybe the refugee crisis will spur them on into doing a positive reaction to the crisis.”

Finally, Reader Mike R. said: “The refugees are coming from countries where population growth exceeded the resources and the ability of their governments to handle it. The results are civil wars, religious wars, genocide and mass exodus.

“The Germans are going to regret opening the flood gates. For small countries like Hungary, Austria, Slovakia, this is an existential threat, based on their experience a few centuries ago, as well as recent experience with immigrants in France and U.K.”

Let’s face it: There are no easy solutions to what’s going on in Europe. Policymakers want to do the humane thing to help those fleeing war and poverty in the Middle East and Africa. But many governments fear being overwhelmed by the costs and other burdens of flinging open their doors. Long-standing cultural and language barriers and concerns are driving other reactions, not all of them encouraging.

As for China, I don’t see much the government can or should do to prop things up. Too much mal-investment and too much easy money helped fuel asset bubbles over there, just like it did here. The downturn China is facing now is the inevitable consequence of the booms that preceded it. Central bankers both here and there never seem to get it!

Anything else you’d like to share on these or other topics? Don’t hold those comments in then. Post them at the Money and Markets website.

Other Developments of the Day

● The QE addicts didn’t get another fix from the Bank of Japan overnight. Policymakers there refused to boost the current 80-trillion-per-year QE program, claiming the economy would recover and push inflation up to its target.

But the program that has been in place since April 2013 obviously hasn’t worked, or we wouldn’t be in a position where some are asking for yet another round of Japanese QE. And as I’ve said over the past few months, investors are no longer buying central bank actions for more than a few minutes or hours. They’re selling into those rallies. That’s a change of pattern from the past several years, one you should take note of.

● Will the credit lifeline finally run out for cash-strapped oil and gas drillers? That’s what the Wall Street Journal says could happen soon as banks re-evaluate credit lines in October, potentially driving some firms into bankruptcy. Others will do their best to survive by pushing suppliers for price cuts, selling off assets on the cheap, or turning to private equity saviors.

● Hungary tightened its border controls to stem the flood of migrants into the country, fortifying the frontier with Serbia and closing down a rail crossing that some immigrants had been using.

● Wildfires continue to rage in Northern California, claiming one life and forcing 13,000 to leave their homes. Drought and high winds helped exacerbate the blazes, which have burned some 270,000 acres.

What do you think about the latest BOJ move, or the outlook for oil and gas producers? Any thoughts about Europe and what happens next, in light of the ongoing migration crisis? Use the website as your outlet today.

Until next time,

Mike Larson