Tuesday, May 13th, 2008
Should I trade bear-market rallies?
Many ‘gurus’ tell growth investors to sit out bear markets in cash and wait for a bull market to return. But opportunities are thrown up in bear markets on the long side all the time, particularly during bear-market rallies.
While my market analysis tells me this is not a bull market, it is frustrating sitting here constantly identifying stocks that go on to perform well. The question then is: do I start playing bear market rallies?
At the moment I’m choosing not to play. This is probably what Warren Buffett would recommend: if you don’t have to swing for the ball, don’t swing! When it boils down to it, my edge is simple: buy aggressive-growth stocks in strong up-trends during bull markets. Then ride the stocks as far as I can.
I’m prepared to sit around for months – even years – waiting for this scenario. But that doesn’t mean I don’t do anything. I perform my analysis every day looking for opportunities and preparing for a bull market.
That means I’m constantly seeing chances to make money. At the moment there are some aggressive growth stocks – largely in resources and energy – in strong uptrends. Do I buy them?
One option is to trade 20 per cent of the value of my portfolio during bear-market rallies using smaller-sized trades; ie risking 1 per cent, rather than my usual 2 per cent.
The second option is to take profits more quickly during bear-market rallies, rather than hold them through the entire uptrend.
But there are a few arguments against both of these strategies: some 90 per cent of my profits, even during a bull market, are from a handful of big winners. The rest are small profits or small losses. In a bear market surely my win/loss ratio would be smaller and I suspect I’d just be spinning my wheels.
I’m also appalling at swing trading. It is too short term and messes with my mind. I like to place trades where I put on a bet and then can relax and let it play out. During a bull market I have confidence that I can place a trade and then sit through volatility knowing the broader market is my ally. During bear market I get jumpy and check the stock all the time, because I know I’m bucking the trend.
As I said, when it boils down to it my system/analysis says we are not in a bull market. So by definition my edge isn’t present. So despite the temptation, it’s probably best to sit and analyse the market, be patient and wait for the right time. Then I’ll be ready to exploit the bull market to the max.
Word Count: 441. This entry was posted on Tuesday, May 13th, 2008 at 12:34 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
May 27th, 2008 at 2:55 am
It is great that you are being patient during this time. If you need to sit it out you should. I have 2 suggestions for you.
1. Paper trade during bull rallies. See how you do with your current system before putting real money into the markets.
2. Maybe try to short or buy puts. I find I like bears markets better then bulls markets because you can make money faster. When stocks move down they fall fast.
http://www.stocks-simplified.com
July 2nd, 2008 at 8:03 am
Hi Shaun
Thanks for your comments
I do short sell.
I suppose I find bear-market rallies frustrating because they’re dangerous to short during.
But I also don’t want to go long. So I’m doing nothing.
What I should be doing during bear rallies is spending more time preparing for the market to resume its bear trend.
July 7th, 2008 at 1:27 am
[...] my last post I wrote about how frustrating it is to sit out bear-market [...]