Dare to Face the Bear

Gordon Scott  |

The signs of a new bear market are evident. Anyone who has been stubbornly bullish may feel as though they are looking down the barrel of a .44 magnum with the market standing over them asking, “So the question is, do you feel lucky?” How can anyone be bullish in the face of such intimidation?

Admittedly it is hard to buy into such a steep downward slide, or even find a reason for wanting to do so.  But what if, just what if, the market were not setting up for a drastic free-fall, but simply making an unusually volatile pullback?  What if this week meant the best possible new buying opportunity to come along in a year? How would you know it, and what would you do?

Unlike the last two bearish tops, this time around I feel strongly aware of the fact that EVERYONE seems to be recognizing this bearish breakdown. In the past 48 hours I have read over a dozen expert opinions proclaiming that the bear market is here and a recession is possible. Fact is I agree with them. However the degree of certainty I hear, and the breadth of sources from which this message is coming, gives me pause.

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Such widespread worry could mean one of two things. The first is that this down turn is so blindingly obvious that I shouldn’t delay but simply get short today. But a second possibility nags at me. It is that this might be a clearly over anticipated (and therefore very weak) bearish move. If that were true, I’d like to be a buyer. But how can I do so if the bottom is set to fall out?

Well here is one possibility worth mentioning: buy the tech sector and sell the industrial sector short.  Notice the following graphic which tracks several sector-based ETFs. In this graphic you can see that that the tech sector (orange line) makes a less-downward trajectory over the past 10 days than the others, while the Industrial sector is leading the charge to the down side.

So a simple strategy would be to put on two trades with trailing stops. Let the loser get stopped out and let the winner run. If the bullish run starts now, you will likely be participating in the strongest sector, whereas if the bear market breaks, a short position on a stock in the industrial sector will likely produce rapid gains. If Dirty Harry’s punks had these kinds of choices, his overpowered pistol would be forced to leave less time for tense monologue. Where trading is concerned, you’ll still live to trade another day if you pick the right strategy. In fact, with this strategy, it will be you standing over  the bear market saying, “go ahead punk. Make my day!”

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