The Rules Change In A Bear Market

11 RUT- Bear market

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I’m operating with the notion that we are in the early stages of a new bear market (and global recession). My longstanding readers know I first turned defensive (here) on equities in early August 2015 (before the big August crash).  In the short term, the action remains lousy on Wall Street (to put it nicely). The major indices continue to break down and several key stocks broke down badly after reporting earnings ($GOOG, $ICE, $LNKD, $DATA, $RL, just to name a few causalities from last week). I’m often asked, how do you navigate a bear market?
First, cash is a position for those of you who don’t want to deal with the nauseating moves that occur during bear markets. Second, for those of you who want to play, keep in mind, the rules change in a bear market. Keep in mind: markets move in cycles. There are only three things any asset (stock, bond, currency, commodity, real-estate etc) can do: move up, down or sideways. In uptrends, conventional wisdom tells us to buy low and sell high. Or buy high and sell higher (for those of you who like to buy breakouts). You have also probably heard the old adage about buy the dip and sell the rip. I can go on and on but you all know the “rules” in a bull market.
Put simply, the rules are reversed in a bear market. Instead of buying the dip, you sell the rip. Meaning, if you are looking for tactical trades, look to short strength, not buy weakness. Instead of buying pullbacks into logical areas of support (prior chart highs, 50 Day Moving Average line – or other moving averages- etc etc) look to short strength into logical areas of resistance (prior chart lows, 50 Day Moving Average line, etc etc). The list goes on and on but the important thing to keep in mind is that emotions rule in bear markets and the swings can be VERY erratic, both up and down. Also it is important to note that every bear market in history was followed by a fabulous bull market. So patience is and can be your best friend. Finally, keep in mind the largest moves (both up and down) happen in bear markets.
“Always keep your losses small and never argue with the tape.” – Adam Sarhan

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