Defining Stock Market Modes: Depression, Crash, Bear, Correction, Dip, Pause, Hold

While interpolating the Deep Value ETF Accumulator chart, one might ask what is meant by the “MODE”.

The modes are simple lines-in-the-sand that represent how far a financial instrument such as a stock, bond, index or ETF has fallen from a recent peak price.

I’ll let you know up front, I had to do an internet search to find this information. The best information I found on this subject was from Joshua M. Brown (aka Downtown Josh Brown) at this website: http://thereformedbroker.com/2014/02/03/a-field-guide-to-stock-market-corrections-2/

Here is the chart he used to define each mode:

I use a very similar method to define the mode of each ETF in the Deep Value ETF Accumulator chart. I added the “HOLD” mode because that helps me identify holdings that are ripe for selling off some excess returns; i.e. trim-the-fat. Most of the time, I am holding the ETF’s that are at or near their 52-week or all-time highs (ATH), but sometimes I will trim-the-fat and move some money to a fund that is out-of-favor.

The ETF’s that I track are usually hovering in the “Pause thru Correction” modes. As of today, 12-22-16 there are only two that are dancing in and out of Bear and Correction modes. Back in early 2016, a few of the ETF’s were flirting with Crash mode, but they didn’t quite make the grade. It is my preference to accumulate shares that are “on sale”. So, that is why the rankings in the Deep Value ETF Accumulator chart are based on this list of modes and percentage points off from 52 week highs.

If you look at the following links about the frequency of stock market crashes and bear markets, you’ll quickly realize that they are relatively infrequent and therefore the broad markets do not give us a great deal of opportunities to “buy low”.

https://en.wikipedia.org/wiki/List_of_stock_market_crashes_and_bear_markets

http://www.nbcnews.com/id/37740147/ns/business-stocks_and_economy/t/historic-bear-markets/#.WFyiP_krLDd

http://www.yardeni.com/pub/sp500corrbear.pdf

https://www.americanfunds.com/individual/planning/market-fluctuations/past-market-declines.html

https://www.bloomberg.com/view/articles/2016-01-22/corrections-bear-markets-recessions-and-crashes

So, the fewer the asset classes in the portfolio that you are willing to accumulate, the fewer opportunities you may have to “buy low”. Yes, I may be overdiversified or even “diworsified”, but that is a risk that I am willing to take. For example, as of today, we are in a raging bull market. Almost everything is expensive and a typical 4 fund portfolio would give us scant few opportunities to “buy low”.

On the other hand, you could open-up the number of investable securities to accumulate, and then you will most certainly find good funds that are currently out of favor. Here’s a Deep Value ETF Accumulator chart from 12-21-16 for comparison.

I know some people like to buy the dip (BTD), but I prefer to buy corrections, bears and crashes.

Thank you for reading and check back again soon for information on how to find value in traditionally growth oriented asset classes.

Micah McDonald

The Deep Value ETF Accumulator

micah@dvetf.com

6 Replies to “Defining Stock Market Modes: Depression, Crash, Bear, Correction, Dip, Pause, Hold”

  1. I understand you like to hold your assets near 52 week highs or ATHs, trim the fat to rebalance your holdings. What is your strategy on funds that drop? For example, if something drops 20% from 52 week high. Do you exit at a certain level or just hold?

    1. Hi Dan. When a fund drops a lot as you mentioned, I accumulate (buy) it. If the fund continues to drop, I continue to buy. For example, right now I am accumulating XLE. If XLE stops dropping, I’ll probably start accumulating EWZ. I built this website to help ‘force’ me to buy low and ‘trim the fat’ when I have significant profits. Although, my first goal is to accumulate lots of great assets at great prices. I hope I’ve answered your question. Thank you. Micah

  2. Hey Micah,

    Very interesting idea you came up with. How often do you buy (once a week/month/etc)? If you have a fixed amount to invest each month, do you put 100% in the deepest value ETF or split it up between several deep value ones? How do you know when to “trim the fat”?

    Thanks,
    Eric

    1. Hi Eric. Thanks for the questions. I’ll try to address them all.
      I usually buy about twice a month with cash-flow from my income.
      Sometimes I buy more frequently if I have more cash-flow, but never more than once a week.
      I usually buy on Mondays, for no better reason than it gives me a couple days to think it over.
      When I buy, I make a purchase equivalent to 1% of all my portfolios.
      For example, if all my portfolios equal $150k, I’d buy $1500 lots.
      The self-imposed 1% rule is there to keep me from over-trading.
      I never buy or sell less than $1k lots because I have $6 or $7 commissions at my brokerages.
      Once I’ve begun to accumulate an ETF, that’s the one I accumulate until it bottoms out.
      Once an ETF that I’m accumulating bottoms out, I quit buying it, even though I could continue buying shares “cheap”.
      The reason for this is that I don’t know that it actually bottomed, so I could potentially buy shares cheaper in the future.
      Since I have 2 IRAs, 1 401k and a brokerage account, I sometimes accumulate more than one ETF at a time.
      I am almost always accumulating an ETF that is in the top 5 of my list.
      I am almost always accumulating ETFs that are in correction or in worse condition.
      I trim the fat when I have a minimum $1k profit in that ETF in one account.
      For example, if I paid $5k for 50 shares @ $100/each of XYZ ETF and it grew to be $6k, I’d sell off approximately 9 shares @ $120 to ‘trim the fat’.
      Sometimes I have as little as $1000 invested in an ETF, so in order to ‘trim the fat’ in that situation it would take a 100% gain.
      If I have $10k invested in an ETF, it only takes a 10% gain to ‘trim the fat’.
      Most of these self-imposed rules are just to keep me from over-trading or making emotional decisions.
      It works well for me and that’s why I started the website, to share my investing philosophy.
      Thanks again Eric for the questions.
      Micah

Leave a Reply

Your email address will not be published. Required fields are marked *