INVESTING: As bull turns to bear, wise investors see opportunities

A lot of investors are doing some deep thinking right now. People lost money in the first quarter. Now the second quarter is shaping up to be more of the same.

For the most part, on a broad portfolio basis, many people are only now getting back to even with five years ago. But just as things start to pop above water, the losses begin to pile up again.

The portfolio devastation most Americans suffered in the last bear market was severe enough to create a permanent sense of skepticism among many people. That makes sense, and it is part of the reason I have felt that a real powerful and long-term bull market will most likely not begin until the baby boomers begin to die off. The fear level of an entire generation needs to be permanently removed before the market can exhibit the kind of foolish euphoria necessary to create a rip-roaring bull market.

But the bull market that began in March 2003 is most likely not over, despite recent downdrafts that suggest otherwise. At the same time, the next bear market is somewhat within our sights, possibly beginning in about nine months, and there are some things we can do now to take advantage of the time left to this bull.

Investors don’t change their actions on a dime. The transition from bull to bear is like summer turning into winter, except the signs are not quite as obvious. Before winter comes in full force, the days gradually cool off and the trees slowly lose their leaves. By watching the signs, we have plenty of time to prepare.

But experience tells us not to be fooled by only one or two signs. It is certainly possible to have a few cool days in the middle of August, but that won’t have us running to the closet to make sure our hats and coats are ready.

What we have experienced so far this year is the late days of summer. We’ve had some rough weather as a small warning, but that’s all it has been so far.

A few weeks ago, I thought the large banks may have left the party and the weakness could easily be attributed to the Federal Reserve’s rate-increasing campaign. But stocks like Citigroup and Bank of America don’t look so bad now.

The market will show its hand before winter hits. As of the rally highs set on March 7, there was little internal negative divergence to suggest that the bull market is over. The increased levels of volatility we have seen lately are simply part of an aging bull market.

One indicator I put on the table once in a while is the Dow Jones utility index. The utes will typically top out anywhere from three to nine months before the broad market heads south. The utility index hit a new rally high last week.