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

4 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

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