LEARNING HOW TO TRADE IN A BEAR MARKET

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If you do not know how to trade in a bear market you need to learn…and soon.  I am not referring here to limiting your losses by buying “bear market” stocks that outperform the S&P (interpreted: do not do as poorly).  What I mean is you need to learn how and what instruments to trade that will allow you make money when the market goes south.  And how do you do that you ask?  By turning your computer monitor upside down!  You do not have to go to that extreme of course but your perspective will have to go from looking for bullish set-ups to bearish ones. 

What follows are a few reasons why I believe it is important that you learn how to trade the next big move down in this market and the best instruments to use to catch this move.  I could write a book on it but I do not have the time.

TECHNICAL

The market has had a huge run since its lows in March. Does not mean it is finished running but there comes a time of profit taking and there is much profit to be made by those who were smart enough to ride the liquidity wagon up to this point.  Greed catches up eventually and when it does it can be hard to swallow.  I just wonder how many money managers and hedge funds are holding on to the end of the year or how many are slowly selling in order to store up a few nuts for the winter that may be approaching.  Keep in mind nothing goes up forever and another correction can be just as deep as the rise.  The market is obviously getting tired as the futures have been on a 18 day sideways move below resistance (as of this writing).  Could be gearing up for another run for the last hoorah or it may be getting tired of bumping its head on the resistance.  We will soon see which. 

We also have some key leadership groups that are struggling.  Just take a look at the financials.  You cannot have a bullish market without them. Following is the S&P Bank Index (BIX) DAILY chart.  Caution: it is not pretty.  Same goes for the XBD and RKH. 

Most of the oil sector stocks have hit resistance on the WEEKLY charts at the 200 TANKS and are now struggling as well.  XOM and SLB are indicative of the group as a whole.  The following is SLB on the WEEKLY.

In fact, the OIH (Oil Services ETF) gave us a DAILY CROSSHAIR sell signal just two weeks ago.

 Just a few technical issues that you need to be aware of going forward.

ECONOMIC

I rarely ever speak of economic conditions, reports, etc. as something to be traded and I am not going to do so here.  All I know is that “still waters run deep” as the saying goes.  The economic waters are deep and there may be few life preservers left for the weary.  Much like the person who maxes out multiple credit cards, losses his job, and cannot pay his mortgage, our government is near maxing out, seeks to apply band aids to job losses, and will soon have to repay a hefty mortgage or sell the house.  Problem is there may not be any takers.  Add to this the next to 0% interest rates that have allowed the banks to make money again. At some point the FED will begin raising interest rates.  When it does, the profits will dry up as there will be no one left to loan to.  In the meantime, if the market begins to even get a whiff of it’s possibility watch out below. 

BEARISH INSTRUMENTS

So, what can you trade when the market is down? I usually buy puts on stocks that are setting up a bearish CROSSHAIR but I will also purchase ETF puts via the SPY, DIA, and QQQQ, to name a few.  There are also INVERSE ETF’s that I will purchase calls on (you simply trade these in the opposite direction of the market).  These include QID, SDS, and DXD, among others.  You can also short particular sectors as well, such as in the oil sector (DUG). 

There is a great list of all of these and many more too numerous to mention here.  You can find this list at INVESTING IN EXCHANGE TRADED FUNDS.

Don’t get me wrong.  I am not a cynic nor am I pessimistic, just a realist and a trader who is more than prepared to trade the down just as confidently as I trade the up.  It may not be time yet for the down but at least we can be prepared for it.

With all this bearish thought and the head scratching at this bear market rally we have been in for the better part of this year and with the understanding that it can continue as long as it so desires, there is one person we should always think of during times like these.  He made the most prescient of quotes many moons ago and it still rings true today: 

“The market can stay irrational longer than you can stay solvent.” John Keynes

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