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How to Trade a Bear Market

By Jeff Clark
Thursday, July 1, 2010

You cannot ride a bear.
 
Rodeo cowboys score points by staying on the bull as long as possible. Investors profit by doing the same.
 
But a bear is a completely different animal. No cowboy is crazy enough to saddle up and try to ride a grizzly. Yet investors try it all the time – and they get killed.
 
Bear markets are not for riding. They're for trading. That means you wait for severely oversold conditions before you buy anything. Then you sell when conditions become less oversold.
 
And you wait for severely overbought conditions before selling stocks short. Then you cover those trades when the market turns neutral.
 
It's not a buy-and-hold environment. It's a "scalping" environment – you play only the best setups and take profits quickly.
 
Stocks are now officially in a bear market.
 
The monthly chart of the S&P 500 closed below its 20-month exponential moving average (EMA) yesterday. The rally from the March 2009 low is over. So as I wrote on Tuesday, it's time to sell.
 
But let's be smart about it.
 
Short-term conditions are wickedly oversold, and the intermediate-term indicators continue to point to a bounce. Rather than sell into violent downside moves, it's smarter to wait for the inevitable bounce and use that strength to cash out of long trades and enter a few short trades.
 
As you can see from the following chart, stocks usually do bounce hard at the beginning of a bear market...
 
 
 
The bear markets that began in late 2000 and early 2008 both experienced bounces where the S&P 500 rallied back up to test the breakdown level of the 20-month EMA. I expect something similar to happen this time as well – before a much more serious decline takes hold.
 
Of course, it's OK to sell now, too. After all, stocks are likely headed much lower by the end of the year. Just don't be surprised if they work higher over the next month or so.
 
Best regards and good trading,
 
Jeff Clark




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Market Notes
Mega uranium miner Cameco hits new 52-week low.
 
Agriculture giant Monsanto hits a fresh low on disappointing earnings.
 
New low for world's largest water infrastructure company... Veolia down 40% from September 2009 high.
 
Natural gas royalty trusts still going strong... San Juan Basin up 20% over past three months as S&P falls 10%.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1027.37 -0.3% +11.3%
Oil 32.87 -3.2% -12.3%
Gold 117.04 -3.8% +26.7%
Silver 17.44 -4.2% +28.7%
US-Dollar 84.58 -1.7% +6.2%
Euro 1.25 +2.3% -11.6%
Volatility 32.86 -4.9% +25.3%
Gold Stocks 453.52 -4.6% +27.9%
10-Year Yield 2.93 -0.7% -17.2%

World ETFs
Symbol Price
Change
52-Wk
USA 102.76 -0.5% +11.3%
Canada 24.61 -1.1% +13.3%
Russia 16.38 -1.0% -4.9%
India 30.27 +0.1% -5.4%
Israel 13.31 -1.1% +22.1%
Japan 9.23 +0.3% -3.3%
Singapore 11.29 +0.4% +23.1%
Taiwan 11.18 -0.2% +8.3%
S. Korea 44.91 +0.5% +25.1%
S. Africa 52.78 +0.3% +10.4%
China 39.38 +0.6% +1.7%
Lat.America 41.86 +1.1% +19.3%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 96.24 +1.7% -1.2%
Big Pharma 59.08 -0.8% -1.2%
Internet 49.40 +0.9% +17.4%
Semis 12.17 -0.3% +9.9%
Utilities 28.13 -0.5% -0.4%
Defense 15.98 -1.1% +13.7%
Nanotech 8.30 -1.1% -6.4%
Alt. Energy 8.31 +0.6% -18.1%
Water 14.97 -0.6% +0.3%
Insurance 14.02 -0.9% +18.7%
Biotech 16.93 -1.9% +21.3%
Retail 15.67 +1.0% +12.2%
Software 20.03 -0.1% +18.9%
Big Tech 42.59 -0.3% +17.0%
Construction 11.00 -1.0% +0.0%
Media 11.23 -0.4% +26.8%
Consumer Svcs 54.04 +0.8% +21.5%
Financials 49.19 -0.7% +15.9%
Health Care 57.61 -1.1% +6.7%
Industrials 50.97 -0.7% +21.2%
Basic Mat 53.20 -0.6% +22.4%
Real Estate 47.12 -0.2% +43.9%
Transportation 72.62 +0.4% +24.0%
Telecom 18.69 +0.2% +4.8%

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