By
JAMES “REV SHARK” DEPORRE
Although the Dow Jones and S&P 500 have yet to meet the formal definition of a bear market, which is a decline of 20% or more from recent highs, it is clearly a bear market. for a large part of the market and have been for some time. The fact that the senior indices do not reflect what happened below the surface is one aspect of this action that has made trading particularly difficult.
Since 1928, the S&P 500 has on average experienced a bear market about every four years, but most investors are never ready for them and run into the same problems every time. Much of the pain of the current bear market has already been felt, and it has been hard enough for long enough that many traders and investors have given up. This discouragement is a natural part of the process and will continue for some time. Here are 10 tips to help you navigate this bear market:
- It’s always different. While the cycle of bull and bear markets is inevitable, each bull and bear market has unique characteristics that should be considered when developing a trading or investing style. There is no single strategy for every bear market. One of the main differences in the current bear market is that it has been very uneven. Speculative areas of the market began to peak in February 2021. Other elements peaked in November. It was only recently that large-cap tech stocks finally cracked. This is important, because it means that the eventual recovery is likely to be uneven as well. This bear phase is unique, which means that we will have to constantly change our strategy as it unfolds.
- Stop the bleeding and break the inertia. The biggest frustration in any bear market is that we don’t sell fast enough and stocks that look safe aren’t. The typical reaction is to freeze up and think it’s too late to do anything. You have to break that mindset, and you do that by selling something. Stop looking for a reason not to sell and throw something away. It may be the wrong time, but it’s surprising how it will change your mindset and empower you to take action. Inertia is your enemy in a bear market.
- Mark to market. A good way to regain control of your inventory is to forget about your cost base. Treat your stocks as if you just bought them that day, then set new appropriate stops and stick to them. Forget what happened in the past and focus on what you can control today.
- Stop predicting. The best way to handle a bear market is to admit that you have no idea when it might end. The corporate media tends to make predictions because this is the kind of news that sells, but these are just guesses. Nobody knows how things will develop. The only truth is price action, and that’s what you need to watch more than anything else. Don’t dwell on trying to guess when the bear market might end.
- The fundamentals don’t matter. One of the main reasons traders hold onto their stocks in a bear market is because they believe the market will appreciate exceptional values. Unfortunately, bear markets don’t work that way. Valuation becomes moot and there is always a liquidation phase where everything is sold, regardless of their merits. Eventually, this creates exceptional opportunities, but the return of the market to a “stock picking” state of mind can take a long time. Focus on price action rather than fundamentals until the market returns to a “stock picking” environment.
- Play moves against the trend but be very clear on timeframes. The biggest bounces happen in the worst markets, and there can be some great upside trades if your timing is right. But it’s paramount that you have clear timelines and don’t let a failed trade turn into a long-term investment. This is what causes some of the worst pain in bear markets.
- Stay patient. Bear markets will wear you out. A general belief is that bear markets tend to end in a huge drop caused by panic selling. The reality is that bear markets end with a whimper, not a bang. Bear markets are so painful because they drag on much longer than expected, and many people give up out of frustration and desperation. Stay patient. There will be a natural tendency to want to believe that the market is bearish, but it is better to remain skeptical.
- Better late than early. Trying to catch the exact bottom is almost a competition when it comes to a bear market. Everyone wants to be the genie who calls the exact bottom. The problem is that this is only possible if done prospectively. You can only predict the exact bottom if you do so while the stock is still falling. The much safer approach is to wait for some strength and use recent lows as a stop level. You won’t buy the exact low like people who try to buy into the teeth of a decline, but you’ve defined the risk, and the potential to catch the upside momentum is starting to develop.
- Rebuilding takes time. After taking steep losses in a bear market, we are inclined to try to trade more aggressively to recoup losses quickly. This is a recipe for disaster, as taking more risk while the market is still in transition can easily backfire. Once the market begins to recover, the focus should be on further gains. You will recover your losses by working day by day as the market improves.
- Maintain a positive mindset. The most important thing you can do during a bear market is cultivate a positive mindset. The ugliness of a bear market always leads to new exceptional opportunities. It is inevitable, and we must be patient, vigilant and ready to act when conditions change.
It’s a miserable bear market right now. Accept that and get ready for the bullish cycle ahead.
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