Stock Ideas arrow Stock Ideas arrow Investors Daily Edge arrow Seven Steps to Profiting in a Bear Market
Rating
Click for Help

Market Watch

By Charles Delvalle
I love seasonality in the markets because it makes it so easy to make money sometimes.  And if you take advantage of the seasonality move in oil, you’re bound to make some good green.
More...
 

Most Popular

Login Form






Lost Password?
No account yet? Register
Seven Steps to Profiting in a Bear Market
User Rating: / 0
PoorBest 
Wednesday, 06 February 2008
Jon Herring
IDE reader DL in Seattle wrote in to ask a question that has been on a lot of readers’ minds:
“From everything I gather, it appears that the U.S. markets are entering bear market territory and that an economic recession is upcoming.  Does the Investor’s Daily Edge team believe we are in a bear market and that a recession is imminent? And if so, how should I invest differently?”       
I don’t know of an “official” definition of a bear market, although there are a few definitions that are generally accepted.  When the market drops 10 percent, it is generally considered a correction.  Fifteen percent or more and it’s a bear market.  By that definition, we are in a bear market.

Another definition of a bear market is when the S&P 500 (SPX) closes a month below its 20-month moving average.  In January, the SPX did just that. The last time the index crossed below this line in the sand was seven years ago.

The technical definition of a recession is two quarters in a row of negative GDP growth.  We won’t know if that’s the case until after it has occurred, but it appears likely the U.S. is entering a recession.

But even if we are in a bear market and the early stages of recession, you shouldn’t let that change the way you invest.  Generally, you want to do the same things in a bear market as you would in a bull:

  • Diversify broadly and allocate your holdings across multiple asset classes.  Having your entire portfolio in stocks is a bad idea even in a bull market.  It’s a horrible idea in a bear market.
  • Insist on buying truly great companies with a strong competitive advantage at a price that offers a wide margin of safety.  In a downtrending market, the converse applies.  In that case, it makes sense to allocate part of your portfolio to shorting (or buying puts) on poorly managed and significantly overvalued companies.
  • Stick to reasonable position sizes.  Nothing can destroy your returns faster than taking on a position that is too large.  Five percent of your overall portfolio is generally considered the upper limit. Even if you lose 20 percent of this amount, the total effect on your portfolio is only a 1 percent loss.
  • Mind your stops.  Risk management and capital preservation are the keystone of successful investing.  You will rarely be able to time your sells near the top.  Trailing stops are the best way we know to avoid selling too early ... or worse, too late.
  • If you are trading for the short or medium term, buy what is hated and sell what is loved.  When conditions feel the riskiest, when there is “blood in the streets” and seemingly no bottom in sight, it is usually the best time to buy.  And when investors and the media are most bullish, it is usually best to sell.
  • Avoid trying to catch a falling knife.  If you find an undervalued stock in a falling market, wait for a clear uptrend to emerge.  If you want to reduce risk even further, break your position size in half or quarters and make your buys over a designated period of time.  Buying a full position and then “averaging down” as the price falls is almost always a bad idea.
  • If the mantra in a bull market is to “buy the dips”, that of a bear market is “sell the rallies”. The market has clearly established a downtrend. And if the fundamentals are any indication, we still have further to fall. If your portfolio is too heavily allocated toward equities, or if you own too many stocks that won’t fare well in a recession, take advantage of the rallies to lighten your load.

Fraudsters, Corrections and the American Way

by Andrew Mickey They’ve really done a job on us, haven’t they? The banks are behind this one all the way. Although the total losses and write-downs from subprime lending are hovering...
+ Full Story

Canadian gold stock thrives in turbulent market

With the world economy on the brink of recession... China has a plot to snatch huge profits from a dirt-cheap Canadian "gold mine" While most companies around the world are crumbling in...
+ Full Story


I believe we are in the early stages of a bear market and economic recession.  And for those who are prepared, that can be a good thing. Bear markets are when some of the market’s greatest fortunes are made, as shortsighted investors drive prices of great companies well below their underlying value.  Now is the time for discipline and due diligence ... but it is no time to cut and run.

Respectfully,

Jon Herring

P.S.  To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

  • We endeavor to decipher analysis of this Teaser/News Letter to distinguish the thoughts of Authors/Editors.

  • Please post your Review/Comments, your rating helps other users gauge the value of an article ...

  • Was this service a Ripoff ? Click Here To Post Your Ripoff Story !


Bookmark and Share




RSS comments

Write review Your rating helps people guage value of an article
Name:
E-mail
BBCode:Web AddressEmail AddressBold TextItalic TextUnderlined TextQuoteCodeOpen ListList ItemClose List
Review:

I wish to be contacted by email regarding additional comments
Sorry but! We have to make sure that you are not a bot Please solve this simple math before you submit: 
OM2         HA9      
  3    L      J   7AS
4QI   BKP     H      
4      I      8   PWR
44F           5

 
< Prev   Next >
[ Back ]