Friday, August 19, 2011

Bear Market Rules

With the markets down 15% from the peak earlier this year and macroeconomic data pointing to a recession, it seems useful to go over bear market rules.

1.  Oversold conditions are dangerous in that they often resolve to more selling.  In other words don't try to pick bottoms based on oversold conditions.  Do NOT buy the dip in a bear market.  You sell the pops in a bear market.

2.  New long positions should be short term trades only.  Do not get married to your AAPL because it's made you so much money in the past.  If you want to go long set a predefined stop and stick to it!

3. Overbought conditions may present a selling opportunity.  The market has just crashed and bounced up about 10% to 1200 on the SNP.  Perfect opportunity to sell right there.  Markets never even made it back to overbought because it was so deeply oversold but everyone sold the bounce. 

4.  Increase cash/fixed income positioning.  Cash is not trash in a bear market.  Fixed income generally is non correlated with stocks and so provides a good place to hide out in bear markets.  Corporate balance sheets are so pristine right now so they should have no problems paying you back.

Remember...Don't feed the bears!

6 comments:

  1. do you think capitalism and we should turn to Socialism like many people have been suggesting ??

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  2. no, capitalism will always be the best system to encourage innovation and people to better themselves.

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  3. Never feed the bears! Capitalism will still be dominant and that won't be going anywhere anytime soon!

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  4. thanks for the tips, i think its best to play on the short side at this time.

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