Given the recent market conditions, I’ve been increasingly asked “how do you navigate a bear market?” It’s important to remember that the rules change in a bear market. Even though we aren’t there yet, it is always good to educate and prepare well in advance. Here’s what I do:
Understand that cash is a position
First and foremost, understand that cash is a position. This is especially true for those of you who don’t want to deal with the nauseating moves that occur during bear markets.
Second, for those of you who want to play, keep in mind that the rules change in a bear market. Markets move in cycles. There are only three things any asset (stock, bond, currency, commodity, real-estate etc) can do: move up, down or sideways. In uptrends, conventional wisdom tells us to buy low and sell high. Or buy high and sell higher (for those of you who like to buy breakouts). You have also probably heard the old adage about buy the dip and sell the rip. I can go on and on but you all know the “rules” in a bull market.
The rules are reversed in bear markets
Put simply, the rules are reversed in a bear market. Instead of buying the dip, you sell the rip. Meaning, if you are looking for tactical trades, look to short strength, not buy weakness. Instead of buying pullbacks into logical areas of support (prior chart highs, 50 Day Moving Average line – or other moving averages- etc etc) look to short strength into logical areas of resistance (prior chart lows, 50 Day Moving Average line, etc etc).
The most important thing to keep in mind is that emotions rule in bear markets and the swings can be VERY erratic and very large both up and down. It is also important to note that every bear market in history was followed by a fabulous bull market. So patience is and can be your best friend.
What if you can’t short?
If you want to short but don’t have the ability to short because you do not have a margin account, find inverse ETFs to express your idea. Two very popular inverse ETFs are SDS (2x short SPY) and SQQQ (short QQQ).
Two very good sites to research ETFs are:
