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Stocks vs. ETF’s- which is better for long-term investors?

Tag: coronavirus

Stocks and ETF’s (exchange trade funds) are different, but still potentially profitable for investors. Investors can choose from many high-profile growth stocks.  ETF’s can have lower risk than stocks because they have diverse holdings. But which one is best for long-term investments? This TradingSim article will tell readers the difference between stocks vs. ETF’s, compare the performance between stocks and exchange-traded funds. This article will also analyze and compare the 10 top stocks and ETF’s performance in the stock market and determine which investment product is best for investors.

Stocks let investors focus on one company

Stocks are individual shares of a particular company. A company can offer shares of a company to raise funds or various other reasons. When an investor picks a low-risk value stock like Apple(NYSE:AAPL), an investor owns a piece of Apple. US stocks can trade on the New York Stock Exchange or NASDAQ. A stock’s value can fluctuate based on whether there is a bear market or a bull market. Investors can have their say in shareholder meetings and be an activist investor if they want more say in how the company acts in the future. Companies offering stock also can offer quarterly dividends to investors as well.

Stocks vs ETF’S- stocks offer individual shares and are more volatile.

Stocks focus on one corporation but are very volatile. Outside forces in the stock market or the corporation’s own fortunes can reverse, driving a stock down. Stocks are very volatile and can be risky for investors looking for long-term options.

Stocks vs. ETF’s: Stocks may be better for tax purposes

When comparing stocks vs. ETF’s, stocks may be better for investors that are concerned about tax benefits. Benjamin C. Halliburton, chief investment officer at Tradition Asset Management said individual stocks offer an advantage.

” Individual stocks are more tax-efficient than mutual funds and should be utilized in taxable portfolios when the investor has enough assets,” said Halliburton.

ETF’s offer a basket of stocks and securities

ETF’s buy stocks, bonds, and commodities into a basket. Similar to stocks, ETF’s are sold shares of the basket holdings to investors on the New York Stock Exchange, the American Stock Exchange, and NASDAQ. Another similarity between stocks and ETF’s is that they both offer quarterly dividends to investors just like stocks.

In contrast to stocks, ETF’s are a collective investment. Just as there are thousands of different stocks, there are numerous ETF’s for investors to choose as well. Some are from mixed industries. There are ETF’s for everything from gold to marijuana. while others may focus on one sector, like tech. ETF’s can also have holdings from other countries, while New York Stock Exchange stocks are only U.S.-based.

In the comparison of stocks vs. ETFs, both ETF’s value can fluctuate like a stock. ETF’s often mirror the movement of the stock market. So, any decline in the stock market could greatly negatively impact ETF’s .

ETF’s are also different from stocks because they offer inverse ETF’s. Inverse ETF’s are created to profit when there is a decline in the markets. They’re best for short-term investments because they use derivatives that are sold every day by the fund’s managers. Inverse ETF’s can lead to losses if held more than a day. However, inverse ETF’s can be less costly than shorting stocks.

John Hood, president and portfolio manager at JC Hood Investment Counsel, noted that inverse ETF’s could be risky for investors.

“When you’re dealing with inverse or leveraged ETFs, you’ve left the investor market and entered the gambling market,” he says, adding that many investors don’t understand the product before buying. “I’ve had people call me and say that they have a leveraged two-times ETF and, as the market has been going up, their ETF has been going down. Well, they didn’t read the details first.”

Stocks vs. ETF’s: How do they compare with liquidity?

Stocks and ETF’s differ slightly with liquidity. Liquidity is the conversion of stocks or ETF’s into cash. Penny stocks that don’t have as much value as stocks with bigger names may not have as much liquidity. However, blue-chip stocks like Microsoft (NASDAQ:MSFT) offer more liquidity than ETF’s because different factors affect and ETF’s liquidity. ETF liquidity depends on the fund’s trading volume and the quality of the ETF’s products. Stocks offer an advantage over ETF’s if investors are looking for easy liquidity.

How did the top stocks and ETF’s perform during the bull market?

While stocks grew exponentially during the bull run, ETF growth exploded from 2009-2018.  With ETF’s that tracked along with the S&P, they both rose equally during the bull market to $4 billion in assets by 2019. As the S&P climbed 14% in 2016, ETF volume also surged 17% in 2016. John Davi, founder and chief investment officer of Astoria Portfolio Advisors, noted that ETF’s that followed the S&P 500 and minimized risk exceeded expectations. 

“If you look at all the ETFs that have gathered the most assets over the last 10 years, it’s going to be your SPY, your EFA, EEM, so, those are low-cost, pure-beta ETFs, like your standard wealth management solutions. So, USMV is the largest asset gatherer outside of that core, so I like it. It hedges the downside risk,” said Davi.

How do the top 10 stocks vs. ETF’s in recent performance?

During the current bear market, stocks and ETF’s have different returns on investments. TradingSim’s charts will be used to analyze the top 5 performing stocks and ETF’s of March 2020 since the COVID-19 crisis started. While both stocks and ETF’s can’t be exactly compared based on performance, the analysis will show a broad overall comparison. The comparative data will show which perform better for long-time investors.

Clorox outperforms other stocks during coronavirus crisis

Clorox (NYSE:CLX) had a 24% gain over the past month. Because of the coronavirus crisis, the cleaning product company has seen a double-digit gain. Clorox has become a safe-haven stock in the midst of the COVID-19 crisis. While there is competition from store-brand disinfecting wipes, shoppers and investors flocked to Clorox over the past month as a trusted name brand during the coronavirus crisis. In addition to cleaning wipes, Clorox also makes hand sanitizer, a sold-out product during the current pandemic.

Clorox stock boomed and increased 17% overall since the start of the year. The household product industry is typically recession-proof and outperform the S&P 500. Clorox stock was also helped by the Environmental Protection Agency. The EPA recently recommended many Clorox products for Americans to use, which helped the company’s stock rise as well.

“Using the correct disinfectant is an important part of preventing and reducing the spread of illnesses along with other critical aspects such as hand washing, ” said the EPA in a statement.

During the coronavirus pandemic, financial analyst Steven Strycula predicts that Clorox will likely be a well-performing stock that investors can invest in for good returns.

“Based on conversations with retail buyers, we estimate COVID-19 related demand could boost baseline disinfectant category trends by 3-5x in the next few months as retailers work to rebuild inventory and stay in stock,” said Strycula.

This TradingSim chart shows Clorox’s stock rising the week of March 19.

Clorox stock the week of March 19

Vanguard Total Stock Market ETF

Of the many ETF’s offered, some ETF’s from Vanguard have fallen below expectations. Vanguard Total Stock Market ETF (NYSEMKT:VTI) is one ETF that is down 14% year-to-date. Because this ETF tracks the overall stock market, the fund has stumbled over the last month. Davi noted that Vanguard ETF’s will perform eventually perform well despite the current stock market volatility. He noted that since ETF’s launched in 1993, they have been a low-risk option for investors. 

“For my money, we prefer a little bit more transparency than less in general, but I’m always amazed about the ETF product,” said Davi. “I’ve been working in the ETF ecosystem for 20 years. I remember when iShares first launched 25 ETFs in one day. People were like, ‘Why do you need a single country? Why do you need a subsector ETF?’ And sure enough, we have an entire industry now. So, there’s always a market.”

This TradingSim chart shows the trajectory of the Vanguard Total Market ETF.

Vanguard Total Stock Market ETF

Davi notes that the recent $1.9 billion inflow into the Vanguard Total Stock Market ETF shows that this ETF can be resilient. Because the fund has shares of well-performing stocks like Walmart (NYSE:WMT), Davi feels that the ETF can bounce back.

“I think, overall, things feel a little bit more normal. I know the economic front is going to look pretty bad and it’s going to look real ugly in terms of unemployment claims, but price action on the ETF front has been encouraging. There’s actually been more inflows into ETFs, too. So, Vanguard took in a bunch of money in Q1 and I think [it] shows that the retail investor has been kind of hanging in there for the most part,” said Davi.

In this stock vs. ETF comparison between Clorox stock and Vanguard Total Stock Market ETF, Clorox has the edge.

SPDR Consumer Staples Select Sector Fund outperforms during coronavirus crisis

Just as Clorox stock and consumer staple stocks have performed well during the COVID-19 crisis, consumer staple ETF’s have also done well despite Wall Street volatility. The SPDR Consumer Staples Select Sector Fund (NYSEARCA:XLP) has been a safe haven ETF, according to investor Kent Thune.

“When information and data are short or absent, an investor must use their intuition, which comes from a combination of experience and educated guesses. In the short-term, no one knows where the market is headed. But it’s a reasonable bet that the U.S. is already in a recession, which will last months, not weeks,” said Thune.

The TradingSim chart below shows the strong performance of the SPDR Consumer Staples Select Sector Fund.

SPDR ETF Consumer Staples Select Fund

David Reyes, a financial advisor and chief financial advisor, noted that ETF’s like Consumer Staples Select Fund could be best for beginning investors.

“The best thing about index investing is that it is simple,” said Reyes. “Most investors are not comfortable managing stocks, so this is a great way to get exposure to the stock market without having to be a stock expert.”

SPDR’s Consumer Select Fund has the most holdings with Proctor & Gamble. Those consumer products have been popular with toilet paper and cleaning products being high in demand. The ETF is down 17.3%, year-to-date, but is still one of the top-performing ETF’s in this Wall Street volatility. It’s only down 6% from its record high in February.

The ETF could help improve the portfolio of long-term investors. In comparison between stocks vs. ETF’s, both Clorox and SPDR’s Consumer Select Fund are both equally strong investments for traders looking for long-term investment.

Gilead stock grows with possible COVID-19 treatment

In addition to consumer staples, biotech stocks have grown during the coronavirus pandemic. Gilead Sciences ( NYSE: GILD) stock has grown 24% over the last month and 15% since the start of 2020. The biotech company’s stock rose after the corporation developed an experimental drug, remdesivir, to treat COVID-19. Financial analysts at SunTrust Humphrey Robinson expressed optimism that the drug showed promise. However, they couldn’t make conclusive judgments about the drug since it was tested on a small group.

“We believe remdesivir could show benefit and clinical improvement; however, we cannot draw definitive conclusions from a compassionate use data given the limitations (such as small sample size, lack of controls and randomization and short follow-up periods),” wrote SunTrust Humphrey Robinson analysts.

Dr. Jonathan D. Grein, director of hospital epidemiology at Cedars-Sinai Medical Center in Los Angeles, also expressed cautious optimism about the effectiveness of remdesivir.

The TradingSim chart below shows the rise of Gilead stock.

Gilead stock the week of March 19

“We cannot draw definitive conclusions from these data, but the observations from this group of hospitalized patients who received remdesivir are hopeful. We look forward to the results of controlled clinical trials to potentially validate these findings,” added Grein.

On top of Gilead’s promising COVID-19 medication, Gilead is dominant in medications for chronic diseases like arthritis. The corporation also has the best-selling HIV drug that has increased sales. Because of Gilead’s rising stock and biotech’s growth during the coronavirus crisis, the stock has been a solid buy for long-term investors.

SPDR S&P Biotech ETF strong despite Wall Street downturn

Gilead is a holding in the SPDR S&P Biotech ETF( NYSEARCA:XBI). The biotech ETF been performing better than expected in this economic downturn. While the ETF’s performance dropped 20%, the SPDR Biotech ETF was still outperforming the S&P 500 before the COVID-19 crisis. The low-expense ratio of 0.35% makes the SPDR S&P Biotech ETF an affordable option for investors. The ETF is still performing well compared to other biotech ETF’s with many biotech stocks in its basket .

The TradingSim chart shows the performance of the SPDR S&P Biotech ETF the week of March 19.

SPDR S&P Biotech ETF

Gilead has edge in biotech stocks. vs ETF fight

Both Gilead and SPDR Biotech are equally good options for biotech investors. In a comparison of stocks vs. ETF’s, because both are in a field with large growth potential, they are possible great options for investors. However, Gilead has an edge over SPDR S&P Biotech ETF with greater gains over the last month.

Activision Blizzard stock steady as gamers have more time to play

During the nationwide quarantine, gamers have been getting a lot of practice playing Call of Duty. Activision Blizzard(NASDAQ:ACTI), the company that produces the popular video game, had its stock rise 2% over the last few days after financial analyst Eric Handler upgraded the stock from neutral to a buy.

“We believe management is making significant progress in improving its near-term and long-term growth profile,” said Handler.

Activision is also highly rated by other financial analysts. Todd Gordon, managing director at Ascent Wealth Partners, noted that Activision has a strong standing because of its popular games.

“Activision’s the bigger of the two. It’s a $46 billion market cap. They’ve got franchises like Call of Duty and Candy Crush. They have a better share of mobile gaming. Activision is well-represented across multiple platforms including PC, console, gaming, stuff like that. So, we hold Activision in our global growth portfolio,” said Gordon.

Activision Blizzard teams with WHO to reach more gamers

Gaming has even received a boost from the World Health Organization. The organization tweeted its support of gaming.

“We’re at a crucial moment in defining outcomes of this pandemic. Games industry companies have a global audience – we encourage all to #PlayApartTogether. More physical distancing + other measures will help to flatten the curve + save lives,” tweeted the World Health Organization.

Activision stock the week of March 19

Activision Blizzard stock is a stock that is a strong one for long-term investors who want a piece of the growing gaming industry.

Even though Activision Blizzard stock is down 1% this year, that’s still below the S &P’s decline of 11%.

Gaming stocks vs. ETF’s: Van Eck’s Gaming and Sports ETF performing well during quarantine

In addition to Activision performing well, the stock is part of a rival ETF (NERD). The ETF that’s competing with Activision’s ETF is Van Eck’s Gaming and Sports ETF (ESPO). is up 5% this year. Esports is also a bright spot in the stock market. Business Insider Intelligence noted that esports are growing since other physical sports are on hold during the quarantine.

“Total esports viewership is expected to grow at a 9% compound annual growth rate (CAGR) between 2019 and 2023, up from 454 million in 2019 to 646 million in 2023. That puts the audience on pace to nearly double over a six-year period, as the 2017 audience stood at 335 million,” stated Business Insider Intelligence.

Tony Hershey, a gaming stock expert, said that esports stocks and ETF’s can be profitable.

This TradingSim chart shows the trajectory of the Van Eck’s Gaming and Sports ETF.

Van Eck’s Gaming and Sports ETF

“You’re now seeing [the market] differentiate between sectors and areas that can actually perform here [given the current environment, and] the data points are bearing it out,” said Hershey.

“If anything, I see current circumstances as accelerating a shift from physical to digital,” he added. “Esports are uniquely positioned relative to traditional sports to thrive in such an environment.” 

With gaming stocks vs. ETFs, ETF’s have edge

VanEck product manager noted the success the gaming ETF can have during this stay-at-home time.

“Video game and esports stocks are uniquely positioned to weather this economic recession in which the vast majority of the population is forced to stay inside for extended periods of time,” said VanEck product manager John Patrick Lee in a recent note.

“Across the spectrum of the industry, including live-streaming, esports competition and concurrent users playing, analysts have noted a significant increase in the number of people logging on to play video games. What are people going to do if they are stuck at home for an extended period of time on a mandatory lockdown? Play video games—with themselves and each other.”

With the gaming stocks vs. ETF’s comparison, Van Eck’s Gaming and Sports ETF has a slight edge because of its diversified gaming and esports holdings.

 

Google stock strong with Apple partnership

Another tech stock, Google parent Alphabet (NASDAQ:GOOG) saw its shares jump by 5% after announcing its partnership with Apple(NYSE:AAPL). The two competitors will join forces to create a COVID-19 tracking system on iOS and Android phones. The partnership will likely continue to boost Google’s’ stock. Google’s CEO Sundar Pichai, noted that its growth in cloud computing will help Google’s stock perform well in the volatile stock market.

“Our investments in deep computer science, including artificial intelligence, ambient computing and cloud computing, provide a strong base for continued growth and new opportunities across Alphabet,” said Pichai.

Google hit by COVID-19, but survives with YouTube

Google stock had fallen 27% since the coronavirus crisis started. Suntrust Humphrey analyst Youseff Squali noted that Google’s other businesses have been heavily impacted by the recent economic slowdown.

“A number of key verticals for Google have been hard hit by the coronavirus, social distancing and an overall economy that’s being brought to a standstill. Those include travel, lodging, autos and retail,” said Squali.

Even though many tech companies are suffering from declined advertising, Google is still staying afloat. YouTube is still a strong part of Google’s properties. The popular video on- demand service is predicted to make $9.33 billion in 2020. Squali agreed that YouTube will help Google’s bottom line.

This TradingSim chart shows the volatility of Google(Alphabet stock).

Google stock the week of March 19

“On the other hand, given YouTube’s ability to function as a medium to host both entertainment and news content, we believe it has particularly benefited from increased users and usage, as COVID-19 has forced social distancing and people to stay at home,” said Squali.

Financial experts say Google will survive advertising drought

Citi analyst Jason Bazinet said that he expects Google to remain a strong buy for investors.

“We[Citi] expect Google to have a greater near-term disadvantage but also have a faster recovery as pandemic effects reduce… We believe Alphabet will be more resilient vs. Facebook in weathering the advertising decline due to its lower exposure to the [small business] advertiser base,” said Bazinet.  

Google is a high-profile, but undervalued stock. The tech stock’s trading at only 25 times its earnings. The tech giant is a great buy for long-term investors.

Invesco QQQ Trust Series One pivotal in tech stock vs. ETF fight

Invesco QQQ Trust Series One is an ETF that has underperformed overall, but is still outperforming the S&P 500. The ETF often touts its tech holdings.

Invesco QQQ Trust Series One ETF

 

“Nasdaq-100 companies (are) nimble and at the forefront of numerous long-term investment themes that are still in their infancy, such as big data, cloud computing, machine learning and automation,” states Invesco. 

Even though Invesco QQQ Trust Series One is down 16%, the ETF is still going to survive because it’s heavy in tech stocks. Bob Phillips, managing member of Spectrum Management Group, said the Invesco QQQ Trust Series One could still be a strong buy. The majority of its $86.5 billion in assets are in tech stocks. Tech stocks are still a pivotal part of many ETF’s.

 

“I think tech stocks are a good place to dip your toes back into the water, that makes total sense to me. It’s their ability to access cash at very favorable borrowing levels and their growth prospects because our economy is going to grow again, and tech will be key component of where that growth will come from, ” said Phillips.

Tech stocks help Invesco QQQ Trust Series One, but Google wins stocks vs. ETF battle

Investor Kent Thune noted that Invesco QQQ Trust Series One will still has tech stocks that will help the ETF remain viable to investors and “[t]he QQQ’s inclusion of communications services stocks like Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOG) and Netflix (NASDAQ:NFLX) help ensure its viability amid growing social distancing initiatives.”

Jan Hazius, chief economist at Goldman Sachs, notes that tech ETFs may be a strong choice to survive the Wall Street volatility.

“Financial markets have started to take a more positive view of the outlook. The initial improvement was mostly policy-driven, but the greater optimism of the past week seems to be at least partly related to the virus itself, ” said Hazius.

While the Invesco QQQ is strong and contains Google stock, Google stock on its own is a stronger long-term investment based on its perseverance and future partnerships.

Kroger stock rises as shoppers rush stores

In addition to tech stocks, grocery store stocks have increased as well. Kroger (NYSE: KR) stock rose 20% when Americans rushed grocery stores. Even before the COVID-19 crisis, Kroger’s online sales increased 29% as well. Kroger’s CEO , Rodney McMullen, notes the strong sales that the grocery store chain was having recently touting the success of the stores.

“After experiencing strong sales in February, the COVID-19 pandemic triggered a significantly greater lift in sales across both physical retail stores and digital channels in March,” noted McMullen.

The TradingSim chart below shows the jump in Kroger shares.

Kroger stock

Because of the designation as an essential service and increased hours, Kroger will increase the pay of its workers.

“Our associates have displayed the true actions of a hero working tirelessly to ensure everyone has access to affordable, fresh food and essentials during this national emergency,” said McMullen.

Kroger a strong buy after Buffett pick

Kroger is such a strong buy that Warren Buffett purchased $550 million worth of the chain’s stock. It’s unclear whether the stock surge will last after this crisis. However, after the pandemic, Kroger stock is a strong solid pick for long-term investors that want to invest in a company with growth potential.

Kroger is a solid stock with a healthy dividend that would be a good pick for long-term investors that want shares in a grocery company.

First Trust Nasdaq Retail ETF has slight gain during coronavirus crisis

A retail ETF that is performing well during this crisis is First Trust Nasdaq ETF (NYSEMKRT:FTXD). The retail ETF if performing well with stock grocery stocks like Walmart (NYSE:WMT).

The retail ETF has been performing well as many shoppers have panic shopped in the wake of the COVID-19 crisis. The First Trust Nasdaq Retail ETF has been down 19% year-to-date, but has been up 1% over the past month.

In the battle between the First Trust Nasdaq Retail ETF and Kroger, Kroeger seems to have an advantage based on previous data of more growth over the last month.

Would Fed’s buying ETF’s give them an edge?

Aside from individual comparisons, there will be a government intervention that could shake up the stocks vs. ETF’s war. The Federal Reserve will buy a series of corporate bonds through ETF’s in order to boost the stock market. Dave Nadig, chief investment officer and director of research at ETF Trends, noted that the Fed buying the ETF’s could improve ETF returns-but only for a little while.

“Short term, of course, we know what this means: buying pressure that’ll bring up the price of the ETFs,” said Nadig.

Nadig noted that the Fed purchasing ETF’s won’t be a game-changer against stocks overall. He believes government intervention won’t help ETF’s in the long run.

“I think it’s really important to understand: this is not the federal government buoying the entire market, necessarily. They’re explicitly not going to be buying ETFs that come up at a premium. So, if they manage to sort of re-establish equilibrium in the market, theoretically, that stops the purchasing and then the market can go back to resetting prices,” said Nadig.

Which stocks and ETF’s would be best for long-term investors?

The previous analysis shows that tech, consumer staples, and even gaming stocks can have long-term potential.  However, tech stocks like Google appear to have the best potential for long-term investment because it’s able to evolve with new technology. Large capitalization tech stocks like Google compose about 20% of the S&P 500. They have risen since the coronavirus pandemic.  Tech stocks have performed well because many workers are more dependent on computer technology.

The aforementioned Vanguard Total Market ETF has many diversified holdings and would be best for long-term investment. Even though the fund is currently struggling, it could rebound in the long run. Because it tracks the S&P 500, when the Dow rises again, the Vanguard Total Market ETF will rise as well. 

Because of the growth in medical and biotech ETF’s, long-term investment in SPDR S &P Biotech ETF would be another great choice for long-term investment. Gilead could be a long-term choice because of its innovation in medicine and its potential of its COVID-19 remdesivir drug. 

Stocks and ETF’s that look to the future of technology and are on the cutting edge of medicine would be the ideal choices for long-term investors. 

Stocks vs. ETF’s: Who is the winner?

The previous analysis shows that there’s no clear winner in the stocks vs. ETF battle. Some stocks perform very well based on circumstances. Some ETF’s do better if they have holdings that have longevity with investors. Both stocks and ETF’s may have different performances based on the industries they cover. The performance may also vary based on how the stock market performs overall.

Investors must choose their own investment instrument based on the industry they want to invest in, the amount of involvement they want with their investment. Choosing stocks or ETF’s ultimately depends on how much risk they want to be exposed to in the stock market. Even the great investor Warren Buffett expressed an appreciation for ETF investing.

“If you accumulate a low-cost index fund over 10 years with fairly regular sums, I think you will probably do better than 90% of the people around you who take up investing at a similar time,” said Buffett.

Both stocks and ETF’s are great options for investors for different reasons. If investors want more autonomy with their stock picks and more interaction with picks, stocks may be the better choice.

If investors want more hands-off investment and want a fund manager to pick stocks, ETF’s may be a better option. Investors may also want to pick ETF’s if they want more diverse options to invest in as well.

Regardless of which investment option traders pick, TradingSim can help investors practice trading stocks and ETF’s. Investors can test the stocks vs. ETF comparison on TradingSim to make the best long-term investment choice for them.

 

 

Does turtle trading still work? During an economic downturn, many traders claim to have effective strategies to beat the system and still maximize profits. The turtle trading system is one of those systems. This article will explain the turtle trading system and how it worked for traders in the past. In addition, this article will demonstrate whether turtle trading could work in this volatile, coronavirus-addled market.

What is turtle trading?

When he met fellow trader, William Eckhardt, Dennis asserted that traders could be grown as easily as turtles on a farm that he saw in Singapore. (So, that’s the origin story of turtle trading’s name.) Eckhardt disagreed and thought that traders like Dennis had a natural gift. As a result of the disagreement, they decided to bet and see if Dennis could train random people to trade as well as him.

The turtle trading system started in 1983. ( Cue the Trading Places soundtrack.) Commodity trader Richard Dennis believed that anyone could be taught to trade to be an expert trader like him during the go-go time of trading in the 80’s. Richard became a legendary trader by the age of 26. During his time on the Chicago Mercantile Exchange, he built his net worth up to a staggering $100 million.

As Dennis noted in the book, Market Wizards, “I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.”

Who really started turtle trading?

While Dennis popularized turtle trading, Richard Donchian is the father of trend trading. Donchian started the system in the 1960’s with the following weekly trading rule:

“When the price moves above the high of two previous calendar weeks (the optimum number of weeks varies by commodity), cover your short positions and buy. When the price breaks below the low of the two previous calendar weeks, liquidate your long position and sell short.” 

Donchian had an earlier system of risk-averse trend trading, but Dennis perfected the turtle trading system.

How did Dennis find his turtles?

When Dennis started the turtle trading experiment, he placed an ad in The Wall Street Journal and found 13 “turtles” out of the thousands who applied. He tested them with a series of true-or-false questions. Five of them are below.

  1. Others’ opinions of the markets are good to follow.
  2. Trades in big money are made when one could get long at lows after a big downtrend.
  3. An investor should know where to liquidate if a loss happens.
  4. It is not helpful to watch every quote for an investor’s trading in the markets.
  5. If an investor has $10,000 to risk, an investor should risk $2,500 on every trade.

Dennis chose investors to be turtle traders if they chose 2,4, 5 as true and 1 and 3 as false.

How else did Dennis attract his turtles?

Dennis placed a wide-ranging advertisement in the Wall Street Journal. The ad looked like this:

Richard J. Dennis of C&D Commodities is accepting applications for the position of Commodity Futures Trader to expand his established group of traders. Mr. Dennis and his associates will train a small group of applicants in his proprietary trading concepts. Successful candidates will then trade solely for Mr. Dennis: they will not be allowed to trade futures for themselves or others. Traders will be paid a percentage of their trading profits, and will be allowed a small draw. Prior experience in trading will be considered, but is not necessary. Applicants should send a brief resume with one sentence giving their reasons for applying to: C&D Commodities 141 W. Jackson, Suite 2313 Chicago, IL 60604 Attn: Dale Dellutri Applications must be received by October 1, 1984. No telephone calls will be accepted.

Who were the original turtle traders?

One of the original traders, Michael Cavallo, recalled the simplicity of the advertisement.

“The ad looked like the New York Yankees looking for a starting shortstop,”  said Cavallo.

Cavallo was one of the turtles from very diverse backgrounds. Dennis not only chose turtles from diverse backgrounds but also had diversity in gender as well. In addition to male traders, Dennis chose women to be turtles during a time when there were few women in trading. Cavallo was a commodities trader, but many of the traders were blue-collar workers like Jim DiMaria. DiMaria was grateful for the opportunity to learn from Dennis.

“That was enough to pay my grocery bills and I knew that was going to be secure,” DiMaria said.

Another turtle, Michael Shannon, was an unsuccessful broker until he became a turtle trader. He also noted that the traders learned a lot about discipline from Dennis.

“We’re purely technicians,” said Shannon. “Dennis taught us to be consistent, disciplined and execute the signals that come up and he was right.

What were the turtle trading system requirements?

After Dennis found his turtles, he gave $1 million of his own money to invest in their own accounts. Dennis placed an emphasis on mechanical trading over emotional trading. In addition to purely technical training, he also downplayed the importance of following financial reports on TV or in financial reports. ( No doubt, if Twitter was around, he would have disapproved of that, too.) Dennis put little faith in financial analysis.

‘You don’t get any profit from fundamental analysis. You get profit from buying and selling. So why stick with the appearance when you can go right to the reality of price?” said Dennis.

They could trade a maximum of 12 contracts a day for a month. There were six main turtle trading rules.

What were the turtle trading system rules?

  1. Markets-What to buy or sell. Dennis told investors to invest in all major stocks, bonds, metals, commodities, and currencies. The turtles minimized the risk in multiple markets.
  2. Position Sizing–How much to buy or sell. The turtles traded using a position-sized algorithm. The system looked at a 20-day exponential moving average true range. Turtles used that system to gauge the unpredictability of the markets. The turtles were trained to expand their positions when the market volatility was low. They traded in just 1% of the total equity of their accounts.
  3. Entries–When to buy or sell. The turtles used two different entry strategies. The first entry system was a 20-day high or low. The second was a 55-day breakout entry strategy. Automatic systems create entry systems. Dennis told the traders to take all the signals on offer so they wouldn’t diminish the returns.
  4. Stops-When to get out of a losing position. Dennis taught the turtles to stop losses whenever possible. A pivotal part of stop losses was determining them before the traders’ losses became too big.
  5. Exits-When to get out of a winning position. There were two exit rules. The first rule had a 10-day low for short positions. The second rule had a 20-day/high low for long positions.
  6. Tactics-How to buy or sell. Dennis taught traders about the psychological aspects or turtle trading. He also taught his turtles to exercise patience while placing orders during market volatility.

This TradingSim chart shows an example of trading through trend following.

Riding the Trend
Riding the Trend

Did turtle trading work when it first started?

Turtle trading had mixed results for the traders. One of the turtles, Richard Sands, claims the group netted $175 million using the system. Another trader, Michael Shannon, noted that despite the discipline they were taught, there was a lot of volatility.

“There are days when you take a significant hit and there are days when you make lots of money and of those the days when you make lots of money is probably the most psychologically damaging because suddenly you become fearless.”

How did trend following help turtle traders?

Shannon says he made about $3 million during his four years under Dennis’ tutelage.

Trend following was key to the traders. “The trend is your friend” is a mantra of turtle traders. That belief means that traders can follow trends of growth or value stocks to predict when the next bull or bear market will happen. Shannon noted the simplicity of trend trading.

“The market being in a trend is the main thing that eventually gets us in a trade. That is a pretty simple idea. Being consistent and making sure you do that all the time is probably more important than the particular characteristics you use to define the trend. Whatever method you use to enter trades, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend,” said Shannon.

Even if the trends plummeted, traders still made a profit. Author Michael Covel, who wrote a must-read book about turtle trading, The Complete Turtle Trader, noted that turtle trading worked for most of the first traders.

“Once you recognize that market moves are random you simply need to put yourself in a position where you can capitalize on a move when it happens,” explained Covel.

“Seven out of ten will be dogs but three will make money and trend followers know that the winners will pay for the losses and give them a tidy profit,” added Covel.

What are the key tenets of trend trading?

Financial experts like Ali Hashemian noted that trend following is a systemic and methodical way to trade.

“Trend trading is a systematic approach to investing based on an asset’s current momentum. “A number of different trade signals can be used, and traditionally there are set rules and risk controls put into place when using this trading strategy. Simply put, this trading style captures gains by riding the upward or downward trend in an investment,” said Hashemian.

While many day traders may want to just use the system for stocks, Hashemian says most trend trading can mostly be for futures or commodities.

“Trend trading is commonly utilized by commodity traders,” said Hashemian. “Most often this trading style will include price calculations, moving averages, and take-profit or stop-loss provisions. Traders will use price movement and technical tools to determine trading signals.”

“Signals can often cause a trade too soon, and thus full potential gains are not always captured,” said Hashemian.

How can turtle traders identify a trend?

There are three types of primary trends that turtle traders can monitor to make trades.

  1. Uptrends happen when stock prices increase. Turtle traders can go long on the stock as it’s rising.
  2. Downtrends happen when a stock is falling. A trend trader can go short on a stock’s falling price.
  3. Sideways trends happen when stocks are reaching neither higher or lower points. Turtle traders may not act on these trends, but day traders who want to jump on short-term market movements may want to move on sideways trends.

What system can turtle traders use to monitor stocks?

The turtle system used the Donchian Channel, a trend-following indicator. When turtle traders use the Donchian Channel , they usually set the indicator to monitor stocks over a 20-day price range. The original turtles traded during a 20-day breakout. However, they would only trade if there wasn’t a trend from the previous 20-day breakout. Turtles felt that if the previous trend couldn’t predict a breakout, the next breakout would produce a trend. Traders felt that they were minimizing risk if there wasn’t a previous breakout.

The 55-day Donchian channel indicator was added to catch more long-term emerging trends in the markets. Traders didn’t have to wait for a breakout to fail before making a trade. The Donchian Channel indicator is still used today by many traders.

This TradingSim chart shows how the Donchian Channel can be used for low-volatility stocks.

Donchian Channel with Low Volatility Stocks
Donchian Channel with Low Volatility Stocks

What are the top trend indicators for turtle trading?

The Donchian Channel is a moving average indicator. Moving average indicators are just one of the many trend indicators. Here are three of the most popular trend indicators to help turtles trade and track trends.

1.Moving average indicators find the average price of a stock over a timeframe, such as 20 or 55 days. It can predict past trends to help traders track trends better.

2.Average directional indexes track trends on a scale from 0 to 100. Values that range from 25 to 100 indicate a good trend for stocks. Values under 25 indicate weaker trends in stocks.

3.Relative strength index identifies momentum in overbought signals. They’re also used to identify momentum in prices. The relative strength index operates on a scale from 0 to 100. When a stock is overbought, the indicator is above 70. A stock is underbought if it’s under 30.

Why was the turtle trading system successful for some traders?

Trader Mike Martin noted the simplicity of the turtle trading system. Because the turtles only invested about 2% on a single trade, the turtles weren’t hastily risking too much of their money.

“The Turtle rules consisted therefore of a trend-following system of entries, exits and risk management. The model was built to catch the middle of the move and although Turtle trading results were volatile, the group was always managing risk. In essence, risk management was everything,” said Martin.

“The system is genius in its simplicity. A certain mathematical elegance can be found in its use of ATR [Average True Range] for entries, exits and position sizes and what you get out of each is up to you,” concludes Martin.

Shannon also believes that turtle trading was effective for him and other traders. However, the trading system didn’t work for all traders.

Why did the turtle trading system fail for some traders?

While some turtle traders made a profit when they were with Dennis, once they struck out on their own, the opposite happened.

“Interestingly the Turtles all made big money while they were working for Richard Dennis. However in 1988 when they went out on their own things it was another story,” says Covel.

“Many didn’t stick with it and fell apart. So even though there was a mechanical system that they all knew worked, at the end of the day other factors such as character issues became their downfall,” added Covel.

The overriding theme seems to be that systems may not change, but the market does. Financial analyst Mark Biernat noted that the turtle trading system may not work for two reasons. Ironically, the success of the program means it’s easier for other traders to copy. Copycats can alter the system and change a winning formula.

Biernet believes that the turtle trading system worked well for traders until 1996, when newer trading technology may have replaced the older trading systems of the 1980’s. He also asserts that the blue-chip stocks that were prominent in the 80’s like GM (NYSE:GM) are not as dominant as they used to be now.

This TradingSim chart shows an example of the blue-chip stocks the turtles traded.

Blue Chip Stocks
Blue Chip Stocks

Does turtle trading still work in today’s market?

As Al from TradingSim noted in an earlier article about trend trading, day traders may have to adjust their fast-paced trading schedule to move at, well, a turtle’s pace. While the slower pace may have worked with a more primitive trading system in the original turtle’s time, it may be different for more active traders. Busy traders tend to take action more quickly after monitoring the markets all day. However, turtle traders can watch trends develop for weeks, months, or even years.

While turtle trading worked in the 80’s, there are differing opinions about whether the turtle trading system would work now. In this era of Wall Street volatility, Dennis himself acknowledged that the turtle trading system could possibly work now. In an interview in 2018 before the current unpredictability, he noted could be harder to implement now because there was less volatility in the market two years ago.

“Well good luck with that one. The markets have changed a lot. What works is changing and is a bit of a problem, but what’s more of a problem is the lack of volatility. Volatility seems to me to have trailed off over the years intermittently. You know, I’d rather have the volatility back. I mean that’s a variable you can’t control, but I think that it’s more important than adjusting the system, although adjusting the system is important too,” said Dennis.

Original turtle trader says system is evergreen

Jerry Parker, a disciple of Dennis and one of the original turtle investors, believes that turtle trading is timeless. He believes that the pivotal tenet of risk management when trading stocks and commodities is pivotal.

In an interview in 2018, Parker asserted that the main philosophy of turtle trading can be implemented during a bull market or a bear market.

“Well, I would say the basic philosophy hasn’t changed. You’re continuing to do research, finding robust systems, and that means systems with the least amount of parameters that tell you how to initiate, liquidate, or stay out of a trade. We’re always looking to build systems that are based on momentum or based on range dependent discrete time frames where you’re confirming that a trend is in place”, said Parker.

“So, you’re always looking to capture directional price movement. Obviously, managing risk is paramount, so you manage risk from the trade size, you limit it in the markets and sectors that you trade,” added Parker.

Parker also said that the risk management strategy can be tweaked to adapt to today’s stock market.

“We have a risk management concept that overlays the portfolio that’s based on marginal utility. So, we’re harvesting profits along the way which is very different than what we did learn in the original Turtle trading programs. We’re still doing the same things, just a little bit differently than we used to,” said Parker.

Is turtle trading past its prime?

Gruppe Senioren mit Rentnern am Rollator und mit Gehstock

While Parker claims turtle trading is timeless, other financial experts say that turtle trading went out with Jordache Jeans. Trader Scott Michael Cole believes that turtle trading was innovative in the 1980’s, but wouldn’t be effective now. He believes that the turtles had fewer contracts to hold in a long or short position than traders have now. They only had 12 contracts, while there are many more for today’s traders. Therefore, Cole believes that turtle trading wouldn’t work now.

He contends that inflation was higher and there were more trades to follow in the 1980’s than there are now. Cole believes that turtle trading was effective when Dennis first started. However, with the current low inflation, turtle trading may not be as profitable as it was 35 years ago.

Turtle trading isn’t perfect, not even for the king of the turtles. Dennis himself lost $10 million during the Black Monday crash of 1987. He also had to settle a $2.5 million lawsuit brought by investors. The investors said that Dennis himself wasn’t following the turtle trading rules. Dennis settled the lawsuit with the investors, but denied any wrongdoing.

With fewer trends in the current markets, there is also only about a 40% profit from turtle trading. Traders can expect a 60% loss on average. Turtle trading critics argue that while trend following was profitable in the 1980’s with big stocks like GM (NYSE:GM), there isn’t as much of a payoff now.

Turtle trading could work for patient investors

While there are downsides to turtle trading, there can upsides if investors are patient. Some financial experts note that there are four key facts to remember for investors.

  1. Take time with trends. Trend following means catching the trend right in the middle. Don’t rush into trends at the beginning and don’t come into the tail-end of the trend, either.
  2. Position sizing should be minimal. In the current volatile stock market, keep each position small. Only risking 1 or 2% of funds on a trade can reduce large losses.
  3. Diversification is key. Diversification is pivotal to turtle trading. The turtle traders of the 80’s invested in a wide array of assets, from stocks to foreign currency.
  4. Capitalization. Turtle traders don’t need money from Richard Dennis, but they do need a good investing fund to make trades. Because this is low-risk, small-reward investing, emerging turtle traders need a substantial trading nest egg to soften the blow of trading losses, especially during market volatility.
Uptrends turtle traders could monitor

Is there a psychology to turtle trading?

While the Donchian Channel may be an effective tool to measure turtle trading, there were other factors important to the turtle trading system. The turtle system may have worked or not worked for traders because of psychological reasons instead of financial ones. Shannon noted that there was a  “psychological makeup for trading” that outweighed any broker experience.

Dennis noted that mental discipline was just as important to turtle trading as following his rules.

“I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad,” said Dennis.

Slow and steady rule-following wins trading race

Dennis noted that the psychological aspect of turtle trading was important.

“The majority of the other things that didn’t work were judgments. It seemed that the better part of the whole thing was rules. You can’t wake up in the morning and say, ‘I want to have an intuition about a market.’ You’re going to have way too many judgments,” said Dennis.

Fear and greed are the main driving forces behind trades. Dennis and his turtle traders took emotion about out of an investment. By just following the main rules and diminishing emotional trading, turtle traders can possibly maximize profits, according to Dennis.

“The market does not care how you feel. It will not prop up your ego or console you when you are down. Therefore, trading is not for everyone. If you are unwilling to face the truth about the markets and the truth about your own limitations, fears and failures, you will not succeed,” said Dennis.

Mind over matter in turtle trading

As Al from TradingSim noted in a previous article about trading psychology, “analysis paralysis” can hurt turtle traders. While it’s important to read financial articles from sources like TradingSim, ultimately, a turtle trader has to remove emotions from trading, especially when the market is volatile as it currently is now. It’s important to know when to exit a trade as a winner and when to cut losses.

Turtle traders have to learn to accept the risk that comes with investing. Even if there is limited risk in trend following, any loss can be emotionally devastating if investors put a lot of money in a stock. Even though they are following a trend, trends may change, especially with the current volatility in the stock market. Staying calm, especially during this volatile time, could be pivotal to success in turtle trading.

What questions should turtle investors ask?

Turtle investors may be mentally prepared to trade, but they still have to conduct research. Turtle investors often had to answer these questions every time they made a trade. If investors want to be experienced turtle traders, they should answer these pivotal questions.

  1. What is the state of the market? The state of the market is just the current state of stocks. If Apple(NYSE:AAPL) is trading at $140, that is the current state of the market.
  2. What is the volatility of the market? Risk management was important, so Dennis made sure his turtles monitored the stock market each day. If Apple’s stock fluctuated between $130 and $140, then the turtles said they had 1 N or unit of volatility. So, Apple’s volatility, in this case, would be 10 N.
  3. What is the equity being traded? Turtle traders have to know the exact amount of money being traded. If they knew exactly how much they had, they could determine how much they were risking with each trade.
  4. What is the system or the trading orientation? In addition to knowing the exact money turtle traders had available, they also had to have an exact plan for buying and selling stocks. That plan prevents traders from buying or selling stocks out of pure emotion. If Apple stock is tanking, a turtle trader won’t panic sell if they stick to turtle trader rules.
  5. What is the risk aversion of the trader or client? Risk management was the name of the game of turtle trading. If a turtle trader has $1,000 to invest, only 1% or 2% should be invested in Apple stock. The minimal risk enabled turtle traders to minimize their losses.

Turtle trading can pay off- but only if risk is managed well

Trending stock turtle traders may monitor

Turtle trading may work now depending on a trader’s own talent- and temperament. In a bull or bear market, there are many factors that may affect turtle traders. They may have more success if futures or commodities instead of more volatile stocks. Successful trading depends on a trader’s own trading education and psychology. Traders may have success practicing simulated trading on TradingSim to determine for themselves if turtle trading is right for them.

Even though Dennis may not have approved of financial information, TradingSim probably would have been a trusted research source for Dennis and his turtles. With simulated trades on TradingSim, budding turtles can have the best risk management of all with no-risk trades.

Whether turtle trading works now or not, it’s a legendary system that will be studied for generations. Dennis noted that training his turtles was easier and more rewarding than he could have imagined.

“Trading was even more teachable than I imagined. In a strange sort of way, it was almost humbling. ”

The recent downturn in the stock market has many investors concerned about a prolonged bear market. The Dow Jones recently plunged to its lowest levels since the “Black Monday” stock market crash of 1987.  How did the bull run of the 2010’s come to end in 2020? And what does this current bear market mean for investors?

Bear Market
Bear Market

What is a bear market?

Before the bear market of today, the original bear market reportedly got its name from fur salesmen in colonial times.  Investopedia noted that the bearskin sellers were similar to stock traders of today.

“Historically, the middlemen in the sale of bearskins would sell skins they had yet to receive. As such, they would speculate on the future purchase price of these skins from the trappers, hoping they would drop. The trappers would profit from a spread — the difference between the cost price and the selling price. These middlemen became known as ‘bears’, short for bearskin jobbers, and the term stuck for describing a downturn in the market,” noted Investopedia.

Today, a bear market definition is much different. A bear market is a time when major stock indexes drop from a high point by 20% for an extended period.

When was the longest bear market?

The worst bear markets occurred during the Great Depression in the 1930’s. During that time, the Dow Jones cratered by almost 34% after a decline in stocks. Many investors bought the stocks on margin, borrowing funds from brokers. When stocks fell and investors couldn’t pay back their loans, there was a run on banks. The resulting bank runs and uncertainty about the economy led to the great stock market crash of 1929. That subsequently led to the Great Depression that lasted for about a decade until the U.S. entered World War II in 1941.

When did other bear markets in history occur?

During the 1987 crash, the markets dropped 31%. That decline was likely caused by a decline in the U.S. dollar after a widening trade deficit with Asian countries. In addition to the decline of the dollar, the new technology of program trading orders led to the crash. The then-new technology of computer trading had an automatic system that liquidated stocks after price decline targets were met. However, the sell-off led to more panicked selling and stop-loss orders.

As a result, Black Monday on October 19, 1987 led to a 22.7% loss in the S &P. After Black Monday, circuit breakers were put in place on Wall Street. Once losses reach 7%, traders have time to stop trading to prevent the Dow Jones from falling further.

The latest bear market in 2008 saw the markets decline by almost 25%. The last bear market was during the 2008 Great Recession.  The Great Recession started after banks started failing after a previous boom in the early 2000’s.

Banks started failing after many low-income homeowners couldn’t pay their subprime mortgage loans after adjustable interest rates rose. Ironically, banks pushed these high-risk loans to consumers that ultimately led to their decline. Homeowners defaulted on their loans and the housing bubble burst. Once the housing market and banking industries tumbled, the Dow Jones fell by double digits. The Great Recession lasted from 2008-2009.

How has coronavirus caused the latest bear market?

Coronavirus
Coronavirus

Less than a month after hitting a record high of 29, 551. 42 on February 12, the Dow Jones sank 28%. The Dow Jones plummeted to 21,200. 62 on March 12. Fears about the spread of the coronavirus ( COVID-19) pandemic have caused a massive sell-off. The pandemic caused panic since February by spreading from China. The country is inextricably connected to the U. S. because of how many American goods are produced in China. The illness has spread to Europe and to America, with the world’s largest economy.  Many other nations around the world have been impacted by the coronavirus.

Over 118,000 people have been diagnosed with coronavirus worldwide.  The virus has claimed about 4,800 lives so far.  The illness is apparently spread through large crowds. In the reaction to coronavirus has led to a global shutdown of nations affected, especially China and Italy. Coronavirus has caused the cancellation or slowdown of sporting events, travel, and other activities. These social activities that are driven by consumer spending throughout the globe are being disrupted.

The worries about the virus have caused a drastic downturn in trading. There was a halt in trading at the New York Stock Exchange for 15 minutes on several days the week of March 9 because stocks fell so low. The S & P 500 fell 10% on March 12 and triggered a “circuit breaker” that was supposed to halt trading and prevent a further decline. However, the Dow Jones continued to tumble and dropped 2,353 points on that one day alone.

Oil price war adds to Wall Street volatility

In addition to the coronavirus crisis, there have been wild swings in the stock market. The Dow Jones is rattled because of an impasse between Russia and Saudi Arabia, two of the world’s biggest oil producers.  Russia refused to honor an agreement from the oil-producing countries of OPEC ( Organization of Petroleum Exporting Countries.) OPEC initially agreed to cut oil production by 1.5 million barrels a day to drive up prices. Russia refused to go along with the Saudi-led deal. As a result, Saudi Arabia increased its oil production and flooded the market.

Crude oil prices dropped 24% in response to the ramp-up of oil production.  That decline was the worst since the start of the Persian Gulf War in 1991. The drop in oil prices led to more volatility on Wall Street. Foreign Policy columnist Jason Bordoff noted that Saudi Arabia could have an advantage over Russia in the oil price war.

“The problem for the kingdom is that Russia is more resilient to lower prices than it is, having added considerably to its foreign exchange reserves while Saudi Arabia’s fiscal cushion has dwindled since the 2014 oil price collapse,” wrote Jason Bordoff.

U.S. responds to global oil war

In response to the oil price war, President Donald Trump has ordered the U.S. Department of Energy to buy crude oil for the Strategic Petroleum Reserve. Trump made the decision after oil company stocks like Exxon and Chevron have plummeted by double digits. He also made the decision after crude oil prices dropped worldwide.

“Based on the price of oil, I’ve also instructed the Secretary of Energy to purchase at a very good price large quantities of crude oil for storage in the U.S. strategic reserve,” Trump said.

“We’re going to fill it right up to the top, saving the American taxpayer billions and billions of dollars, helping our oil industry [and furthering] that wonderful goal — which we’ve achieved,” added Trump.

The twin troubles of coronavirus and the decline in oil prices have led to volatility on Wall Street that ends the longest bull market in history.

Why did the bull market start?

The bull market ended after an impressive run before falling into a bear market. While the bear market comes when the market falls 20% below a peak, it’s the polar opposite of a bull market.  The term bull market probably comes from the belief that bulls always charge upward with their horns. Therefore, when the stock market is doing well for an extended period of time, that is a bull market. A bull market means that the Dow Jones rises 20% above its current peak for an extended period of time. The latest bull market ran from 2009-2020.

Before the recent volatility, the Dow Jones was enjoying a record run of prosperity. The stock market rocketed 20% above its last peak in March 2009 and has soared ever since. The recent bear market ends the longest bull market that started in the spring of 2009.

How did the Fed help drive the bull market?

As the U.S. was surviving the Great Recession, the federal government’s $700 billion bank bailout helped revive the economy.  In addition to the bank bailouts, the Federal Reserve helped lay the groundwork for the 2010’s bull market. The Federal Reserve spent $1 trillion on mortgage and government bonds to enable quantitative easing. The move pushed interest rates lower and enabled consumers to take out more bank loans and investors to buy more stocks.

The Fed also kept its federal funds target rate at a rock-bottom rate of 0%-0.25%. The federal funds target rate is the rate depository institutions charge for overnight lending to banks. That low rate empowered banks to borrow money at low rates and increase their profits.

In addition to the Fed’s dovish policy that led to helping businesses, the 2017 Tax Cuts and Jobs Act also boosted stocks. The business-friendly tax cuts helped lower the tax rate of corporations. Corporations participated in stock buybacks, which boosted companies’ stock prices.

As a result of all of those factors and a robust economy, Wall Street enjoyed 10 years of a skyrocketing economy amid rising stocks. As a result of the longest bull market, the S&P rose 330% over the last 11 years.

Why did the bull market end?

While the bull market had a long run, even before the coronavirus crisis, there were low points to the bull market wave.  The recent Brexit controversy in the United Kingdom in 2019 temporarily caused a dip in the markets.  Uncertainty about the United Kingdom leaving the European Union led a short-term dip in the global markets. The U.S.-China trade war started by President Trump also led to market volatility in 2019 as well. The U.S. and China engaged in a stand-off over tariffs led investors to worry about how international trade would be impacted.

With the latest volatility in the stock market, the bull market has officially ended.  Coronavirus accelerated the Dow Jones’ decline. Just a month after reaching a record high, the Dow Jones has lost $6.7 trillion in value in the latest bear market. A mixture of a global economic slowdown and investor worries have led to a massive stock sell-off. The official end to the bull market was during the week of March 9.

What is the Fed’s response to the bear market?

Now that the Dow Jones in a bear market, many investors are watching to see what actions will be taken. In response to the Wall Street crash, government agencies are taking action again. The Federal Reserve lowered interest rates in an attempt to revive Wall Street. The U.S. central bank pumped up stocks by lowering its fund target rate to 0% in 2009.

Now the Fed is taking action a similar again a decade later. The Federal Reserve will cut interest rates down to the range of 0%-0.25%. That comes after concerns about the markets tanking the week of March 9. The Fed will also launch a $ 700 billion quantitative easing program. The Fed’s quantitative easing will be comprised of $500 billion of Treasury purchases. The Fed will also distribute $200 billion in mortgage-backed securities.

The Fed released a statement before lowering interest rates.

“The coronavirus outbreak has harmed communities and disrupted economic activity in many countries, including the United States,” noted the Federal Reserve.

The Federal Reserve added that it is making it easier for banks to issue loans to consumers. The U.S. central bank wants to help banks loan more to Americans. The Fed noted that it “is prepared to use its full range of tools to support the flow of credit to households and businesses and thereby promote its maximum employment and price stability goals.”

New York Fed takes action in bear market

Local Federal Reserve banks will also inject cash to try to revive the market. The New York Federal Reserve also recently announced that it will purchase $37 billion in 30-year bond treasuries. 

“These purchases are intended to address highly unusual disruptions in the market for Treasury securities associated with the coronavirus outbreak,” said the New York Fed in a statement.

The New York Fed will offer banks $1 trillion in loans in exchange for Treasury bonds.

Willie Delwiche, an investment strategist at Baird, hopes that the return in qualitative easing will help ease investors’ worries.

Dow Jones the week of March 9

“If the market feels the Fed is responding appropriately and is helping investors and consumers, and feel like somebody is in charge, maybe that can help settle things down,” said Delwiche.

While the action was meant to help the stock market, the bank assistance from the Federal Reserve has had a mixed effect. As of the week of March 16, the Dow Jones still shed another 1,000 points. However, by March 17, the market jumped 1,000 points. By March 18, the Dow dropped again, losing over 2,000 points.

What will be the government’s response to the bear market?

Government Response
Government Response to Bear Market

The Trump administration is taking action to help boost the stock market. The government will offer paid leave to workers who have to stay home under quarantine. Congress is also in negotiations with Trump to offer a stimulus to help boost the Dow Jones. There will possibly a $1 trillion stimulus package that will give $1,000 to each American worker that has to work from home.

Some financial experts want the government to act more urgently to stop the bleeding on Wall Street. Joe Kalish, chief global strategist at Ned Davis Research wants the government to immediately pass a stimulus package to help the Dow Jones rebound.

“We need to see meaningful support for economic activity and credit backstops especially for small businesses, not a targeted approach executed only by the executive branch,” noted Joe Kalish.“We will likely need congressional involvement.  This is a potential solvency problem.”

Should investing in a bear market include “buying the dip”?

Regardless of whether there is government intervention or not, investing in a bear market can either be financially savvy or a financial disaster. Many investors are encouraged to “buy the dip” and buy stocks during this huge sell-off. Buying the dip is buying stocks during a bull market when stock prices are lower.

Some financial experts like David Mazza say investors should buy the dip. The trading expert says investors should invest in stocks when they drop in a bear market. However, Mazza advises that investors should invest in a bear market under certain conditions. Mazza says investors should buy the dip only if they’re optimistic that the stock market will bounce back later.

“From a longer-term perspective, valuations across the market just got a lot more attractive. For investors that do not believe this will lead to a true 2008 type of global downturn, dipping your toes into the water does make some sense”, said Mazza.

Some financial advisors are against investing in a bull market

While some financial experts advocate being a bear investor, others are more hesitant.  Mohamed El-Erian, chief economic advisor at Allianz, cautions against investors buying stocks in a bull market. El-Erian believes that investors are in for the long-haul should exercise caution before buying the dip because of the volatilty of the stock market.

“If you are a long-term investor, I would wait. I think fundamentals are going to deteriorate even faster. I think the policies and fundamentals are going to go in favor of bad fundamentals, unfortunately, initially,” said El-Erian.

Which stocks should investors buy in a bear market?

If investors want to make decisions on what stocks to invest in, there are stocks that are performing well in a bear market. Some stocks have been performing well as a result of the coronavirus outbreak. Costco ( NYSE:COST) stock has risen as shoppers have bombarded the store. They are panic shopping for items and emptying shelves to try to combat the coronavirus. The warehouse retailer’s stock surged 8% on March 13 and subscription numbers are up after shoppers rushed Costco stores.

Costco’s chief financial officer, Richard Galanti, noted that Costco members have bought many items during the coronavirus pandemic that have driven up sales.

“Members are turning to us for a variety of items associated with preparing for and dealing with the virus such as shelf-stable dry grocery items, cleaning supplies, Clorox and bleach,”  said Galanti. He also noted that “water, paper goods, hand sanitizers, sanitizing wipes, disinfectants, health and beauty aids, and even items like water filtration and food storage items” are bestselling items in the stores.

Costco is selling out of Clorox ( NYSE: CLX), another stock that is performing well in a bear market. Clorox’s stock price rose by about 15% throughout 2020 as of March 13. The company that makes cleansing wipes and other disinfectant materials have been flying off store shelves in the wake of coronavirus. UBS analyst Steven Strycula believes that coronavirus (COVID-19) fears will continue to drive Clorox stock up.

“Based on conversations with retail buyers, we estimate COVID-19 related demand could boost baseline disinfectant category trends by 3-5x in the next few months as retailers work to rebuild inventory and stay in stock,” reasons UBS analyst Steven Strycula.

Working from home creates boom in Zoom stock

Another stock that has seen improvement in the wake of the coronavirus crisis is Zoom ( OTC: Zoom) . The videoconferencing software company has seen shares rise as more people are working from home. The stock surged by 24% over the last month. Zoom is continuing to show its strength a year after its IPO went public.

Zoom stock the week of March 9

What stocks should investors avoid in a bear market?

Airline stocks are performing poorly in the wake of coronavirus. Shares in those industries have tumbled as a result of the virus scare. Many people are traveling less in America and there is a travel ban from Europe. All of these factors are making airline stocks a risky investment.  American Airlines (NYSE: AAL) stock is down 50% over the past month. The airlines are hoping that a $50 billion bailout from Congress will help the industry rebound from its current losses.

In addition to airline stocks, cruise line stocks are a poor option for investors. Similarly to airlines, restrictions on cruises and cancellations have hurt share prices.  Cruise lines that have been breeding grounds for coronavirus have been deeply impacted. Shares of Norwegian Cruise Line ( NYSE:NCLH) have cratered by 72% since the global pandemic spread.

Norwegian Cruise Line stock the week of March 9

Restaurant stocks suffer from social isolation rules

Another industry that is struggling amid the economic downturn is in the restaurant industry. Darden Restaurants ( NYSE: DRI) stock is down by double digits. The stock of the parent company of Olive Garden has tumbled by at least 16% since coronavirus spread in the U.S. Social distancing caused many Americans to eat at home instead of eating out at chain restaurants. Many restaurants are closing around the country through state mandates, but chains like Olive Garden will remain open.  Olive Garden noted in a statement that it is adding hand sanitizing locations and separating tables. Darden also said it will give paid sick leave to employees that are not well.

“We are proud of our 190,000 team members for the support they are providing to our communities. One of the most important things we can do is to care for those who care for you. Recently, we rolled out a paid sick leave policy to every one of our hourly team members, so they can stay at home until they feel better while still being compensated”, said Darden.

Despite the precautions and proactive steps to help employees, restaurant stocks like Darden are taking a hit during the coronavirus pandemic. Restaurant stocks may further decline if the stock market continues to experience volatility.

Should investors choose inverse ETF’s in a bear market?

In addition to individual stocks, ETF’s (exchange-traded funds) have been hit in the bear market. However, inverse ETF’s have become attractive in the current bear market. As ETF provider Direxion noted, the ETF’s can offer a quick return during a bear market.

“These tools may be used when seeking to hedge the market. As their name reveals, inverse ETFs go up when the market goes down, and they go down when the market goes up. Inverse ETFs allow you to seek the opposite return of specific sectors and asset classes; for instance, the S&P 500, and Financials, Energy and Technology sectors,” said Direxion.

“Again, the thing to remember about these funds is that they’ll lose value as long as the market keeps going up. But the potential rewards can be attractive if the market suffers a setback. At the very least, inverse ETFs may serve as a hedge. It’s important to note that an –1x ETF which seeks 100% of the inverse performance of an index, is subject to daily compounding. However, basic math dictates that the compounding would be less than the compounding in a -2x or -3x leveraged ETF,” added Direxion.

Which inverse ETF’s would be best for bear investors?

Some inverse ETF’s that investors may decide to invest include these top ETF’s. ProShares Short QQQ  had a 26% return during the 2018 correction and has an annual dividend yield of 1.76%. Direxion Daily S&P 500 Bear 1x and ProShares Short S&P 500 also had double-digit returns during the 2018 turbulence of the U.S.-China trade war. Those ETF’s could perform well during a bear market.

What ETF’s should investors choose in a bear market?

ETF analysts believe that the ETF industry can withstand the volatility in the stock market.  WallachBeth Capital’s Andrew McOrmand advocates choosing options for ETF investors. He also wants investors to research the ETF’s before choosing these funds.

“We do know very active traders that don’t use options. I think options are a great thing,” he said. “I would focus on listed options, listed index options and ETF options, but understand that vol[atility] is high and understand the pricing, meaning that you are going to pay up to put your idea on and, certainly, there’s risk in selling those ideas,” said McOrmand.

“For ETFs themselves as listed tickers, you could look at liquid alts[liquid alternative investments] like QAI and MNA, which are less correlated to the overall market and can dampen volatility,” said McOrmand.

Tom Lydon, CEO of ETF Trends, believes that the ETF’s are a safe option in the wake of the current bear market. He also agrees with McOrmand that staying calm in the face of Wall Street volatility is key.

“We’re cheering on the ETF business for sure. It’s doing what it’s supposed to do at this point. Going forward, I think [McOrmond’s] words of wisdom about being calm, sticking to your long-term model, is important. If you’re trading, make sure you’re efficient in your trading.

What should investors do in a bear market?

With the volatility in the stock market, these actions could be effective for investors.  Investing in a bear market could be profitable with these strategies. Dollar-cost averaging is for risk-averse investors that want to remain steady in a bear market. Dollar-cost averaging means investing stocks at regular intervals at the same amount. This strategy can work effectively during a bear market. Investors put a certain amount into buying stocks.  With a steady amount, there can be a pay-off during a bear market. If stock prices fall, your average cost can fall and investors can buy more shares of stocks.

Diversified portfolios would also be pivotal to investing in a bear market. Having a diverse mixture of stocks, bonds, and futures can help investors in a bear market.  Futures can especially be an effective way to invest. Futures like the E-mini S & P 500 are one of the most trades indexes. Buying Treasury bills can be effective as well.  The yields on 10-year Treasuries have skyrocketed 27.2 basis points in the past few days. Investors are likely investing in a perceived safety in Treasury bonds with the uncertainty of the stock market.

E-mini S&P Futures

Another investment strategy is to invest in stocks with high dividends. Some stocks with high dividend payouts include Big Pharma company Pfizer(NYSE:PFE) and storage company Public Storage (NYSE: PSA). These stocks often give investors high dividends of at least 3%.

Another bear market investing strategy that is effective is simple patience. Because of the volatility in the market, it’s impossible to time when the Dow Jones will enter a bear market. Riding out the wild swings of the stock market is key to investing in a bear market. By just waiting out the bear market investors can profit. Even for passive day trading, thinking carefully before investing will lead to better investment decisions.

Some financial experts see buying opportunities in bear market

While many financial advisors are pessimistic about the current stock market, investor Bill Miller says the bull market is a great time to invest. The chief investment officer of Miller Value Partners said that the bear market can be advantageous for savvy investors.

“I think this is an exceptional buying opportunity. I don’t mean to put all the money in at once but I do think layering it in right now is the way to go,” said Miller.

Financial experts believe bear market will last if no pharma breakthrough

Many other financial experts believe that the bear market will last longer than expected. Paul O’Connor, head of multi-assets at Janus Henderson Investors believes there is a medical component to the Dow Jones recovery. He says that unless coronavirus infection rates slow, Wall Street will continue to be nervous.

“The missing fundamental ingredient for a sustainable recovery in risk appetite is some evidence that the growth of global Covid-19 infection rates is peaking. Clearly, we are not there yet,” said O’Connor.

Tom Essaye, founder of the Sevens Report, also thinks that innovations in medicine is key to helping the skittish stock market.

“Volatility is not over yet,” said Essaye.“We also need to see more progress on the pharma side of things and above all else we need the growth rate of the virus to peak in the coming weeks.”

John Hill, interest-rate strategist at BMO Capital Markets, said that the government’s response is key. He believes the policies implemented will affect the stock market.

“Unless the White House and Congress significantly disappoint with their policy response, there is room for the bearishness to extend,” said Hill.

When will the bear market end?

For investors who want to be more aggressive during this bear market, there are many options. However, it remains unclear how long this downturn will last. The stock market has gone through wild up-and-down swings over the last few weeks. The S &P credit rating agency believes that the U.S. is headed toward a recession.

“The increasing restrictions on person-to-person contact in Europe and the United States have sent markets reeling as risk-aversion rises and views on economic activity, earnings, and credit quality deteriorate sharply,” S&P said in the note.

No matter what happens in the bear market, investors will be closely watching Wall Street. They will monitor what stocks they should buy or sell. The massive sell-off is part of a cycle of bull markets and bear markets. As long as investors are patient and wait out this current crisis, they can find the best stocks, ETF’s, and futures to add to increase their portfolios.