INVESTING: Don’t let down guard; bear market rages on

“As for the longer term, if these investment banks are experiencing this kind of pain in what is really not that turbulent of times, just wait a year. As I mentioned a few weeks ago, the seeds of the next bear market have been planted. It could take a while for the seeds to get going, but when they do, watch out!”

I wrote the paragraph above on Aug. 13, 2007. The investment banks have been hammered since, and, as you know, we’re in a raging bear market.

“Today, the S&P is down about 7 percent from the October high. That leaves a lot of room on the downside. We haven’t even talked about the potential damage that can happen to small-cap stocks (bad things).

“Investors seem to be under the impression that they can hide in foreign markets. Take a look at current prices, not your statement from a month or two ago. You’ve given back a fair amount of your gains. Pretty soon, all of those gains will start turning into losses.”

I wrote this on Dec. 13, 2007. Obviously, there was a lot more room on the downside, as the S&P 500 is now off 19 percent from its October high. Small-cap stocks have been crushed, and foreign markets have been in retreat all year. The Chinese stock market, using FXI as the proxy, is down 24 percent this year, and Europe is down an average of 14 percent in the last 12 months.

OK, you’re thinking: The hotshot columnist called the bear market right, but what’s next?

As a matter of fact, I have a few ideas. The rally from the middle of March was typical of a bear market rally, although it dragged on a little longer than average. It was long enough, however, to persuade most investors that the Fed did, indeed, save the market in March-when it bailed out Bear Stearns-and that everything wrong with the financials was going to be made right.

Rallies can begin at almost any time. Unlike the rally from the middle of March until late May, any rallies that kick off from here will be shorter in duration but sharper in percentage moves. In 2001 and 2002, there were four rallies that went up at least 20 percent, only one of which lasted more than six weeks. In addition to being sharp, the rallies will quickly take almost everything up with them, and they will be led by financials and home builders.

Don’t be tempted. The last and most important point to keep in mind when you are in the middle of a bear market is that the largest losses come at the end of the move. Getting there early can leave you dead. Just ask the many supposedly smart money investors who have been getting blown away by going big into financial stocks. The body count is piling high in stocks like AIG and Citibank. How did these idiots get rich in the first place? It’s called the luck of a bull market.

To summarize: We are still in a bear market, and most likely only halfway through. Rallies will materialize every now and again, and they will seem the real deal. Stay away. Eventually, this market will bottom out.