The Upside of a Legitimate
Bear Market
By Dr. Steve Sjuggerud
July 29, 2008

Welcome to a "legitimate" bear market...

In a legitimate bear market in stocks, two things happen: 

1) Stocks are decimated... to the point at which
2) No sector is spared.

But as far as this particularly gruesome bear market is concerned, there is some good news...

1) Stocks have ALREADY been decimated (the S&P 500 has fallen over 20% from its 2007 high)... and 2) every single sector has ALREADY been dragged down.

So we're at least partway through this bear market now... It's more likely we're even farther along.

And when you're done with a legitimate bear market, you're left with both extraordinary values and a general public that is absolutely disgusted with investing. This means we've got companies so cheap, they're trading at multi-decade lows (or below their liquidation values)... And investors who are convinced they'll never make money in the bear market.

We're already seeing extraordinary values. Some of the best companies in the world are trading for less than 10 years worth of profits. Unfortunately, value isn't a good "timing" indicator of when to buy. So if you're buying on value alone, you can get seriously burned.

Also, we're seeing a general public that's frozen into inactivity. Unfortunately, we haven't yet reached the typical levels of investor disgust you'll see at the bottoms of bear markets...

For example, people still think they could make money in real estate by buying now... even though the economics make no sense. But since they haven't given up yet, they're not fully disgusted. So we haven't hit the bottom.

The best indicator of the end of a bear market is the trend. Unfortunately, the downtrend has not yet reversed. Trends are still down everywhere – in sectors and in countries. Legitimate bear markets are ruthless.

For a quick way to scan the major stock markets, commodities, currencies, and more, we've put together our DailyWealth Market Window. As you "flip" through the charts of the world's stock markets, you'll see no place has been spared. Each country is in a severe downtrend.

Legitimate bear markets wreak catastrophic devastation. But they also create once-in-decade opportunities. We've already reached the point where stocks are a better value today than at any time in the last 10 years.

The Toughest Day of My Investment Career The One Positive Thing About This Bear Market

A huge amount of damage has already been done. So at this point, I think we're closer to the start of something great, rather than on the brink of much more pain.

We're just not there yet.

I promise, I'll let you know when I believe that time is here. You won't want to miss it...

Good investing,

Steve

Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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Today's chart is a bit different from what we usually feature... But it's easy as pie to understand. It's the past year's trading in a sector we've covered quite a bit... the "oil services."

You'll see some black and red bars at the bottom of our chart, which features the big oil services ETF, Oil Service HOLDRs (OIH). The bars represent OIH's trading volume. The black bars show the volume on days OIH advanced in price. The red bars show the volume on days OIH declined.

As you can see, OIH has taken a beating in the past few weeks. Now look in the lower right-hand corner. You'll see the beating has come on huge trading volume, as shown by the tall red bars. This is a sign of big money managers "jumping ship" and taking profits.

The long-term argument for oil services is a great one: Elevated crude oil prices will drive the profits of those who drill, pump, and transport oil. But no asset rises in a straight line... and the market loves to frustrate as many people as possible. Oil services enjoyed a tremendous 45% rally from February to June. That rally – in the short term – is over.