Bear Hugging the Bear: 3 Profitable Strategies Until the Bull Returns
Friday, March 13, 2009 | Ethan RobertsRating:
I had a dream the other night. Rick Santelli, of CNBC, and I were throwing Collateralized Debt Obligation (CDO) papers into Lake Michigan, having a grand old tea party, and Barney Frank was sitting on the pier, offering a humble and sincere apology for telling everyone in 2004 that Fannie Mae was entirely solvent. President Obama was also there, and he was promising investors to suspend all capital gains taxes for two years. The next day, the DOW rose 1500 points, and the bear market was officially over.
Yeah, Right!
Wake up, Ethan. Back to reality. As one who invests in both stocks and real estate, for me, this bear market is a double whammy. Every day is a struggle to find a way to counter the effects of declining stock and real estate prices. But I am holding up fairly well, and today I want to share with you a few tips on what I am doing, and what you can do, should these nasty old bears hang around much longer.
Wow, I wrote the two previous paragraphs the day before the DOW rallied 375 points. Figures, right? Well, the rally was long overdue, since the stock market is so incredibly oversold right now. But even if we do get a few days of rising prices, it still may not mean that the bear market is finished. Bear markets have a habit of hanging around for two or more years, and we are only 15 months into the current one. Can you imagine another year or more of this?
More than a few pundits are beginning to stick their necks out, and are predicting a near term market bottom, but nobody seems to be suggesting that the bear market is actually going to end. So what can we do in the meantime? Plenty!
These are three strategies that I use to fight the bear:
1) Day and swing trading with double short Exchange Traded Funds (ETF). Frequently I buy the PowerShares Ultrashort QQQ (symbol QID), an ETF that is 2x short the Nasdaq 100 (the 100 largest domestic and international non-financial stocks listed on the Nasdaq). One can also buy DXD, which double shorts the Dow, SDS which double shorts the S&P 500, or MZZ, which double shorts the S&P 400 midcap. When the market is declining, QID and these other double short ETFs are extremely powerful. If you buy them at the right time, you can easily make a lot of money in a very short period of time.
Take Monday of this week, for instance. QID was down in the early morning trading, as the market opened a little higher. But when the early price rises could not sustain themselves, the QID came roaring back (see chart below).
As you can see, QID bottomed around 65.35 just after 10 AM, and then bolted up as high as 68.90 by 11 AM, and reached a high of 71.39 by 3 PM, more than a 9% gain from bottom to top. And that's on a day when the Nasdaq was down less than 2% on the day. Catch any piece of that wave, as I did that day, and you can easily offset any losses from your other long positions, or even show a substantial profit for the day.
However, remember that these are short term, volatile trades only. Do not hold these trades for longer than 1-2 days, and put in stop loss orders 1-2% below your entry point immediately after your purchase.
2) Swing trades on oversold quality stocks. When good stocks become really cheap and the technical indicators begin to signal a possible turn around, I like to buy them and hold them for a short period of time. I try to catch a good piece of the bear market rally, then sell and lock in a quick profit. But I will only do this with large or well known company stocks. I don't want to be holding cheap, speculative stocks in a bear market, because when rallies come, investors will buy the well known larger, safer companies first. Some recent short term trades I made were:
Buy Alcoa (AA) at 6.17, sell at 6.78
Buy Southern Copper (PCU) at 13.07, sell at 14.17
Buy Liberty Global (LBTYA) at 10.95, sell at 12.48
Buy Caterpillar (CAT) at 23.51, sell at 24.67.
Because the rallies in a bear market are short lived, I would rather grab profits quickly than risk giving it all back a day or two later. Alcoa, for example, fell all the way back to the low five dollar range within a few days after my sale. As of this writing, LBTYA is at 10.64. PCU and CAT are both higher than where I sold, but I'm OK with that. These trades were closed for profits ranging from 4-13%.
3) Building up cash for a better day. Although it's tempting at current market levels to throw all of one's cash reserves into stocks, dollar cost averaging is the far more prudent way to go. You can do this by buying the same amount of stocks or funds once a month, or you can do it by adding to your stock position at pre-determined levels of the DOW or S&P 500. For example, at DOW 7000, you buy $1000 worth of stock, at Dow 6500 another $1000, etc. However, I think the once a month routine works much better.
Like a young man at the prom with one girl, but courting another one across the room, I am watching the bears dance, while yearning for a return of the bull.
traders do the Wall Street Shuffle...
The question on most investor's minds is, how do we know when the bull market has returned? A quote from William J. O'Neil's book, "How to Make Money in Stocks", is most revealing. O'Neil, the founder of Investors Business Daily, says:
"Watch for the first time an attempted short term rally follows through on anywhere from its third to tenth day of recovery. The first and second days of an attempted improvement can't really tell you if the market has really turned on, so I ignore them and concentrate on the follow-through days of the rally. The type of action to be looked for after the first few days of revival is an increase in total market volume from the day before, with substantial net price progress for the day up 1% or more on the Dow Jones or S&P Index."
So given that Tuesday of this week was the big rally day, today (Friday) is day number four of that sequence, and we can watch for the volume and price action in the next few days to see how O'Neil's theory plays out.
Watching CNBC on Tuesday morning, I really had the feeling that the anchors, especially Mark Haines, were trying their best to make everyone believe that the bear market was over, simply because we had a one day rally. It's hard to blame them for having a bit of glee after watching the Nasdaq fall 12 of the previous 14 days, but their zeal came across as silly, and felt like cheerleading. You could hear their despair on Wednesday, when the market held only a modest gain and it was glumly noted that the volume on the bank stocks had increased on the pull back from the highs of the morning. Yes, Santa Claus had come with gifts on Tuesday, but now it was Wednesday, and some bubble headed adult was telling the little children that Santa doesn't really exist.
"Watch for the first time an attempted short term rally follows through on anywhere from its third to tenth day of recovery. The first and second days of an attempted improvement can't really tell you if the market has really turned on, so I ignore them and concentrate on the follow-through days of the rally. The type of action to be looked for after the first few days of revival is an increase in total market volume from the day before, with substantial net price progress for the day up 1% or more on the Dow Jones or S&P Index."
So given that Tuesday of this week was the big rally day, today (Friday) is day number four of that sequence, and we can watch for the volume and price action in the next few days to see how O'Neil's theory plays out.
Watching CNBC on Tuesday morning, I really had the feeling that the anchors, especially Mark Haines, were trying their best to make everyone believe that the bear market was over, simply because we had a one day rally. It's hard to blame them for having a bit of glee after watching the Nasdaq fall 12 of the previous 14 days, but their zeal came across as silly, and felt like cheerleading. You could hear their despair on Wednesday, when the market held only a modest gain and it was glumly noted that the volume on the bank stocks had increased on the pull back from the highs of the morning. Yes, Santa Claus had come with gifts on Tuesday, but now it was Wednesday, and some bubble headed adult was telling the little children that Santa doesn't really exist.
Trader thanks Santa for bringing Wall Street a huge rally on Tuesday...
but then reality sets in on Wednesday...
Then Wednesday afternoon, I'm outside talking to my neighbor and she tells me that she and her husband have to put their retirement on hold because their 401k has been cut in half. When you are 30 years old and this happens, you simply continue to add money to the 401k so that over time the investments you make when stocks are cheap will eventually bear fruit and even out losses from the shares you bought at higher levels. But my neighbor, whom I would guess is nearing 60, no longer has the luxury of waiting it out over the long term. I find myself telling her that millions of American baby boomers are in the same position, but my words understandably don't seem to offer her much comfort.
This morning I read where Warren Buffett has lost 25 billion dollars in this bear market! Can you even imagine that? I wonder what he tells his wife when he goes home? "Uh, dear, I'm afraid I have a bit of bad news. You are going to have to cancel the new drapes you ordered..." Well, we all know what can happen when you disappoint the wife!
This morning I read where Warren Buffett has lost 25 billion dollars in this bear market! Can you even imagine that? I wonder what he tells his wife when he goes home? "Uh, dear, I'm afraid I have a bit of bad news. You are going to have to cancel the new drapes you ordered..." Well, we all know what can happen when you disappoint the wife!
Don't ever tell your wife to cancel the drapes!
So for now I am content to hedge my accounts and wait for the bear to give way to the next bull. It's comforting to hear the various technical analysts and others parade across my television and tell me that the bear is on his last legs, but somehow I remain skeptical. There's just too much going on in Washington that is contributing to the bear market, too many people still losing their jobs, and too many houses still sitting unsold for me to really be confident. On the other hand, we know that Wall Street always looks ahead 6-12 months, so it's likely that the world will still seem like a dismal place when the next bull market does begin.
And that's no bull!!!
And that's no bull!!!
And now it's your turn. Tycoon readers, how long until this bear market gives way to the bull again? A week? A month? A year? Five years? As always, I would love to hear your thoughts.
See you next week!
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Ethan Roberts
Contributing Editor
The Tycoon Report
