Bear market strategy

During times like this to keep me focused, I tend to review the principles I believe in....principles that have been forged out of years of experience. Doing so helps me to resist the temptations to do something impulsive instead of patiently waiting for the right opportunities. Let's talk about bear markets because that's what were are in right now. The main "tell" that distinguishes a bear market from a bull market aside from an overall downtrend vs an uptrend is that bear markets have much higher volatility on all time frames: intraday, weekly, monthly. This is how you can tell a bear market rally from a bull market rally. While the initial rally from a bottom in both bear and bull markets often appear the same, (fast and furious) what happens afterwards gives you a better sense of determining if the rally is "real" or not. In bull markets you will see small but relentless upward progress almost daily. If you want in you have to chase because pullbacks are few and are quite shallow. In bear market rallies you tend to see the type of volatility like we've been seeing for the past several weeks - huge up days and down days.

My main philosophy regarding bear market is this. Don' lose money. Making money is secondary and if you want to do so you need to take a trading approach both on the short and long side (emphasis on the short side) as opposed to a long only, buy and hold approach that is optimal in bull market. By trading I'm referring to the intermediate term 1-4 month swings not ST trading and especially not daytrading..... I don't believe in those types of trading.  As a speculator you should be looking to make money in any type of market but I find that with bear market because of the heightened and erratic volatility it is easier said than done. Bear markets tend to destroy bulls AND bears alike.

As a result of the heightened and erratic volatility in bear markets, you need to be able to withstand a lot of noise. If you are convinced that the market is headed a lot lower in the months ahead (and not because you're biased or bitter but because you actually have objective reasons) and want to profit from it,  you need to make yourself a strong holder and ensure that your holding period in line with your beliefs. I chuckle when I visit some of these bear blogs and I read commentary from them about how they believe the economy/market is doomed due some macro argument/facts. Then they go out and make a trade like "Short QQQ at 55 with a  stop at $55.20".  Lol! That's fucking retarded. They are using ST trading tactics to profit from a macro conviction. In bear markets because volatility is so high and erratic, making trades like this will almost certainly result in failure.Your trade has to be aligned with market conditions and your conviction. If you can't comfortably make such a  trade then don't make it!

In my opinion, it's only worth trying to profit on the short side during bear markets when the market is overbought and there is strong evidence of complacency with weak bears throwing in the towel. This is characterized by a VIX in the low 20's, a string of low put/call ratios and AAII sentiment 2:1 bulls vs bears. In such instances, the risk/reward is favorable to make a bearish bet.  In the bear market of 2000-2002 we saw this happen in May of 2001 and March 2002. In the bear market of 2007-2009 we saw this happen in May of 2008. At the peak of this latest rally the above conditions were not met...some were almost met but not quite. As a result I didn't pull the bear trigger. That's fine. Again, protecting capital is the primary objective. The fact that we rolled over so soon also suggests that there's a decent chance we are in a situation similar to December 2008 or August 2010 whereby the roll over in the market was part of the LT bottoming process.

To play the intermediate term swings in the market allowing yourself to be a strong holder able to withstand the day to day noise, I believe that the best strategy is to purchase long dated deep in the money options with an amount of capital that you can afford to lose should you end up being wrong. No stops. By risking only a limited amount of capital, that in effect is your stop. This strategy is especially advantageous when betting on the downside. By using puts as opposed to shorting you will never be forced to cover your position if the price goes against you by a significant amount nor will the fear of "unlimited losses" make you unable to sleep at night and tempt you to make an emotional decision.  By using long dated deep in the money puts, you also don't suffer from the time decay that one would experience holding bear ETFs and short dated OTM puts which is the preferred choice of the  retail  schmucks who try to profit on the downside. When playing the bigger swing it's important to stick with your plan. Don't get tempted by ST market action taking profits too soon in the hopes of getting back in on a counter trend reaction...more often then not you will find yourself on the sidelines missing out.

It's a jungle out there. I'm hearing a lot of market veterans who have trade for over 30 years say that this is the toughest market they have ever seen. It doesn't have to be tough. You can simply not play and wait for things to settle down or wait for those really fat pitches.