Customer Service 1 (888) 261-2693
Advanced Search

How to Trade a Bear-Market Rally

By Jeff Clark
Tuesday, January 29, 2008

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 anymore. It's a scalping environment – play only the best setups and take profits quickly.
 
Last week was a terrific practice session for trading a bear market. Stocks started the week in oversold territory and drifted even further into the abyss during Wednesday's selloff. But if you paid close attention, you would have noticed that homebuilders and financial stocks held up well.
 
That was the first clue that we were getting close to a bear-market rally. You see, in bear markets, the stocks that have taken the biggest pounding turn higher first. Those same stocks also post the biggest gains.
 
Sure enough, stocks turned higher on Wednesday... and by Friday morning, homebuilders were up an average of 15% on the week, and financial stocks were up 11%. It was time to sell.
 
No, the stocks weren't expensive, and no, they weren't overbought. But bear markets are fickle creatures. Countertrend rallies can reverse quickly, and profits can disappear just as fast.
 
It's smart to sell stocks as they're moving up and buyers are trying to get in. You may leave some profits on the table. But that's better than holding out for the highest possible price and then having to exit the trade after the stock has turned lower and the buyers have disappeared.
 
If we're entering a bear market, then we're going to see a lot more weeks like the last one. So we'll have plenty of opportunities to profit. Just remember – we don't ride the bear. We scalp it instead.
 
Best regards and good trading,
 
Jeff Clark




Recent Articles
Market Notes
Precious metals march on... streetTRACKS Gold, iShares Gold, iShares Silver, PowerShares Precious Metals, and Central Fund of Canada at new highs.
 
Big Pharma sells off... Shire, Wyeth, and Novartis at new lows.
 
Earnings today... Countrywide Financial, Pepsi, Dow Chemical, and Yahoo.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1221.53 +1.3% +10.1%
Oil 38.31 +1.4% -0.6%
Gold 138.07 +2.1% +16.3%
Silver 28.60 +2.4% +53.6%
US-Dollar 80.67 -0.8% +8.1%
Euro 1.32 +0.6% -12.1%
Volatility 18.01 -7.1% -19.8%
Gold Stocks 581.56 +3.0% +17.0%
10-Year Yield 3.02 +0.7% -10.7%

World ETFs
Symbol Price
Change
52-Wk
USA 122.89 +0.3% +11.3%
Canada 30.50 +0.2% +16.2%
Russia 21.94 +1.4% +18.1%
India 37.85 +0.3% +22.3%
Israel 16.69 +1.3% +10.8%
Japan 10.64 +0.6% +6.5%
Singapore 13.73 -1.1% +18.8%
Taiwan 14.78 +0.4% +19.2%
S. Korea 57.31 +1.3% +23.4%
S. Africa 71.87 +1.4% +28.2%
China 44.42 -1.4% -0.6%
Lat.America 53.17 +0.7% +8.4%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service 137.59 +1.0% +18.9%
Big Pharma 64.14 +0.0% -3.2%
Internet 72.07 -0.1% +23.4%
Semis 16.22 +1.2% +29.4%
Utilities 31.28 +0.2% +1.5%
Defense 18.52 +0.1% +10.6%
Nanotech 10.03 +0.4% +1.6%
Alt. Energy 10.08 +1.3% -3.3%
Water 18.49 +1.0% +14.5%
Insurance 16.14 +0.4% +21.1%
Biotech 20.54 -0.2% +28.1%
Retail 19.70 +0.3% +30.2%
Software 24.79 +0.8% +25.9%
Big Tech 53.87 +0.3% +22.7%
Construction 13.10 +0.9% +15.7%
Media 13.64 +0.5% +26.0%
Consumer Svcs 67.39 +0.2% +24.5%
Financials 55.04 +0.3% +7.4%
Health Care 64.30 +0.1% +2.0%
Industrials 63.54 +0.5% +21.0%
Basic Mat 74.35 +1.1% +25.3%
Real Estate 55.32 +0.1% +25.0%
Transportation 91.77 +0.7% +26.9%
Telecom 22.59 +0.5% +17.8%