Bear Market Trading Strategies
If you spend enough time in the markets, there is a 100% chance that you will experience a bear market in your lifetime.
And probably multiple bear markets.
If you’ve already lived through one, you know how difficult they can be.
If you’ve never experienced a bear market, there is a good chance that you are not prepared for one.
Warren Buffett is famous for saying:
Only when the tide goes out do you discover who’s been swimming naked.
A bull market lifts all boats.
If you make trading mistakes, the gradually rising tide will usually bail you out.
Not so in a bear market.
When the tide rushes out, you can spot the newbie traders and fraudsters lying on the sand.
I don’t want this to happen to you.
I want you to be prepared for the next bear market.
I’ve lived through the great bear markets of 2000-2002 and 2008-2009.
In each one, I made some mistakes, but ultimately emerged wealthier (and wiser).
I want to share with you what I’ve learned.
This book will give you all the tools that you’ll need to spot a bear market on the horizon—and then to profit from it.
Here’s how I define bull and bear markets.
In a bull market, a stock market index (a collection of stocks, like the S&P 500) spends most of its time trading above the 50-day moving average.
And the 50-day moving average is above the 200-day moving average.
In a bear market, a stock market index spends most of its time below the 50-day moving average.
And the 50-day moving average is trading below the 200-day moving average.
Bull markets are almost always a leisurely affair.
They take their time to develop, and usually last 5-15 years.
Bull markets last until everyone is comfortable.
Bull markets make sure that almost everyone is fully invested—and even using lots of margin (borrowed money).
Bull markets last long enough to make sure that all of the amateurs feel like stock market geniuses.
Bull markets feel like a leisurely 10-course meal.
A smooth steady push upwards.
Not so with bear markets.
If bull markets take the escalator up, then bear markets take the elevator shaft down.
Bear markets are fast and furious.
They usually last 6 months to 2.5 years.
Bear markets feel like a crack in the earth opening up and swallowing you.
In a bull market, volatility (how much the market bounces around) usually stays low.
If the market dips (sells off a bit), everyone jumps in to “buy the dip.”
This happens again and again, until a whole generation has been trained to always buy the dip.
When everyone buys every dip, it helps to keep volatility low.
Today everyone is talking about “BTFD”—“buy the f***ing dip.”
We live in vulgar times, but the principle is the same.
Buying the dip has worked extremely well since 2009, but is about to end.
A dip is coming that is going to take out a whole generation.
In a bear market, traders who buy the dip get crushed.
As soon as they’ve loaded up on their position, the bottom falls out.
In a panic, they exit their positions and try to get short (betting on a continued market decline).
As soon as they are short, a fast and furious rally arrives and blows them out of their short position.
In a bear market, there are plunges followed by 2-5 day melt-ups.
Volatility is high.
You are glued to your computer screen and news feed.
Your cortisol levels and other stress hormones stay high.
Your neck and lower back ache all the time.
You see numbers on your screen and cannot believe your eyes.
Companies file for bankruptcy.
Some stocks go to zero.
You might even own a few of them.
In a bear market, you feel like you are walking in a dream.
The feeling is similar to the death of a loved one.
Disbelief, numbness, grief.
There’s only one way to stay sane:
Know what to expect in advance.
Here are some of the signposts:
After the stock market has been going up for many years, you will reach a point where you feel like you are missing out.
All of your friends and neighbors will be bragging about how muchmoney they are making.
Your wife will be asking you why you don’t own stock XYZ.
You’ll try to buy some more stocks, but will find that they are getting away from you.
You had a chance to buy that stock at 70 last month.
Yesterday it was at 90.
Today it’s at 110 after reporting great earnings.
You’re tired of waiting for a pullback that never comes.
So you take that chunk of cash (that you’ve been holding for 5 years), and use it to buy some random stocks that everyone is talking about.
Chances are, you’ve never read a 10-K for those stocks, or analyzed their charts.
But you feel good that you are going to finally make some money with everyone else.
For a few days, you are coining money.
The stocks that you have bought keep moving up.
Like little toy soldiers, they are steadily marching upwards.
Volatility is low, and every dip in the stock gets bought.
Suddenly you wake up one Monday morning and the Dow is down 400 points.
You look at your account and can’t believe your eyes.
Some of your stocks are down 3% and a few are even down 8%.
High volatility has returned to the markets.
The steady climb upwards is over.
Now you get to watch your stocks bounce all over the place.
You’re sweating bullets for a few days, but fortunately your stocks recover.
You’re almost back to your entry points in all of them.
One Friday afternoon, all of your stocks are up 3-5% on the day, and you’re feeling like a genius again.
The pundits on TV have all declared that the correction is over.
There’s still lots of volatility, but at least stocks are moving up.
Unfortunately, none of your stocks seem to be able to make it back up to their highs.
They keep bouncing around within a range (say from 90 to 110).
In addition, the SPY (S&P 500) and QQQ (NASDAQ 100) are having trouble staying above their 50-day moving averages for more than a few days.
Each 50-day moving average begins to droop and turn down.
During the bull market, they were pointing northeast on the chart.
Now they’re pointing southeast on the chart.
Then one bleak day, you realize that the 50-day moving average for the SPY has just moved below the 200-day moving average.
Then the roller coaster begins.
To continue reading this book, click here.
