Surviving Bear
Markets
| Modern participants have rarely faced severe bear market
conditions. Most players wrongly believe that profits will
continue even in a major decline as long as they just flip their
long strategies upside down. But worldwide bear markets present
difficult conditions for most short-side participants.
Trend-following tactics often fail as sudden squeezes offer no
escape and induce heavy losses. |
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A special personality marks each secular bear market. Inflation
or oil prices may drive some while overheated economics or asset
overvaluation awakens others. But bear markets all display one
common characteristic: they make it much harder to turn
short-term profits than typical bull markets. Swing traders
should prepare for the next downturn now so that they survive
and profit while waiting for better conditions. |
| Pattern Cycles suggest effective short sale tactics during
individual stock bear markets. But volume drops sharply through
most phases of a broad worldwide bear depression. This induces
illiquidity and dangerous trading conditions. Spreads widen and
slippage increases for both entries and exits. Opportunities
vanish as good short sale inventories dry up at many
broker-dealers. Reliable information disappears and good sources
close shop due to a lack of interest. |
Bear markets appear through many time frames. They can represent
grand bear markets, cyclical bear markets, intermediate-term
corrections or minor downswings. Minor downtrends can last a few
minutes or days. Longer ones may persist for several months.
Grand bear markets can span decades and embed multiple cyclical
bull-bear swings. These cyclical swings pose the greatest threat
for modern swing traders. Historically this particular bull-bear
cycle lasts about 4 years, with 25% (or 1 year) of that time
spent in active bear conditions.
|
Cyclical
Price Declines |
 |
| Bear
Market |
Percent Decline |
Months
to Recover |
| 1973-1974 |
59% |
48 |
| 1983-1984 |
31% |
18 |
| 1987-1988 |
35% |
20 |
| 1989-1990 |
33% |
7 |
| 1998 |
29% |
2 |
Bears shake out the market infrastructure and realign
prevailing psychology. The actual price decline often takes up
only a small percentage of the time that downtrend conditions
persist. As with stocks, indices fall faster than they rise and
the selling spasms tend to end quickly. The rest of the time the
market meanders back and forth on low volume while it tries to
heal. This offers another clue why trading during these times
can be very difficult. The typical bear market doesn't end in
the high volume capitulation that marked volatile corrections in
the 1990s. It slowly heals as value investors start to move back
into positions. Most other participants will have little
interest in the financial markets by that time.
The media conditions traders and investors to believe that a
simple 20% retracement off the index highs constitutes an active
bear market. This comforts many participants, the small drop in
their portfolios giving them battle credentials. But technical
and psychological damage mark bear conditions with far greater
accuracy than flat percentages. This type of pain has rarely
been experienced over the past two decades.
A bear market corrects the excesses of a specific market uptrend.
It retraces according to classic Fibonacci mathematics. When the
prior rally displays a moderate advance, the bear market may not
need a great pullback to correct the imbalance. But when a
market rally extends to historical levels, conditions favor a
very deep pullback that may take several years of basing before
a new and sustainable uptrend can begin.
 |
| Long-Term Price Recovery:
Oxford Health Plans collapses into a multiyear bear
market. But most of the selloff takes place during only
5 weeks of market action. Unfortunately, the stock needs
far more time to recover from this severe decline. After
more than 2 years of basing, OXHP finally gathers enough
new interest to test the initial breakdown.
|
Swing traders should act defensively through cyclical bear
market conditions unless the intraday charts signal
opportunities. Rallies and selloffs that print in this time
frame offer excellent short-term setups. Tighten the holding
period and step into as many positions as the temporary market
environment allows. Try to anticipate where short covering
rallies will likely erupt. Get in on the same side as the
professionals and use the short seller's panic to turn a profit.
Then find natural reversal levels and flip back to the short
side after the squeeze completes.
As a bear market evolves, follow the daily chart for key turning
points and act defensively at all times. Wait for favorable
reward:risk and avoid being tossed around by the frequent swings
of investor hope and fear. These cyclical events complete
through the same mechanics as individual stocks and futures.
Look for a double bottom or the Big W to signal the end of a
major selloff. Track the growth of accumulation and renewed
interest through long periods of basing. These emotional periods
offer excellent long-term profits for those with precise market
timing. But as with other falling knives, entry requires
execution against popular sentiment. Watch the technicals
closely and act only after cross-verification favors the next
bull phase.
