My #1 tool for spotting an Impending Bear Market.
Tuesday, June 6, 2006 | Teeka TiwariRating:
Some week huh! Boy, have we seen the manic depressive side of Wall Street. We went coast to coast in sentiment, from "the sky is falling, inflation is coming and rates are going up!" to "Oh my gosh! A recession is coming, batten down the hatches, rates are coming down." This, my friend, is the abject lunacy of the street, and I've gotta tell you I love it!! Why?
Because that's when we get to scoop up bushels of fantabulous deals. I use these periodic sell-offs to add to my core long term positions and to put on new positions in strong stocks that are correcting with the overall market.
My short term indicators have all gone positive from very over-sold levels. These indicators typically presage a broad market rally by about 4 weeks. Are they foolproof? Absolutely not. Tell me an indicator that is, and I'll tell you about a bridge I have for sale in Brooklyn!
Anyway, the indicators point to a minimum of a short term rally here; will the short term turn into long term? Only time will tell.
But I'm sure that some of the more pessimistic of you are wondering "What if this is the end of the bull market?" It's a fair question. I mean, what happens if we go into a new bear market?
First of all, I do not think we are about to embark upon a bear market. You must remember that, as a professional money manager, I have no allegiance to either side of the market. I'm just as happy making money on the long side as I am on the short side. (FYI, note to new investors: shorting stocks involves "borrowing" stock you do not own and selling it in the hope of buying it back cheap and pocketing the difference)
I have found one of the greatest tools ever for tipping me off to an impending bear market. Do you want to know what it is?
The STOP LOSS order!
That sounds really dumb and simple doesn't it? But I've yet to find a better gauge. Let me explain, I trade stocks by identifying two types of groups. I want to either be in the best performing stocks in the best performing groups, or I want to be in stocks in groups that have become heavily oversold and are due for a bounce. Several Point & Figure charting techniques allow me to know which is which.
This approach always ensures that I'm positioned to take advantage of the current leaders and the up-and-coming stock market leaders. I typically place my stops two points below support, and so a strong stock should never trade there. If it does, I don't care what it does afterwards … I'm out. My focus, you see, is always to be in the strongest stocks I can find.
Anyway, if I find the majority of my stocks hitting their stops, it's a flashing red light that something is horribly wrong and that distribution is coming into the market place. That's when I start getting super bearish and making extensive use of equity and index options to profit from the short side.
So let's say you're buying fundamentally and technically strong stocks, and you're placing your stop losses a point or two below support levels, and you find your stocks hitting your stop losses. Don't misinterpret that as bad stock picking. Let me explain: A bull market ceases to be a bull market long before the bear market "officially" starts.
The beauty of the stop loss is that it will get you out of the market automatically. Once again, when I start seeing the majority of my trades getting stopped out, I've found it to be a fantastic indicator of an impending bear market. And so I start shorting stocks. This is the difference between amateurs and pros. Pros could care less what side of the market they make their money on, long or short it just doesn't matter. The public abhors the short side, always has and my guess always will. I think the fear of getting caught in a short squeeze scares them to death.
That's where options can be very useful. Put options allow you to benefit from declining stock prices and the most you risk is the price of the option. It's a terrific way to play the short side with very limited risk.
The STOP LOSS order has saved my bacon so many times that I don't even question it anymore. I never personalize getting stopped out, in fact I pat myself on the back for employing sound risk management principals, and so should you.
The beauty of using stop losses is that it protects you from devastating losses and leaves you enough capital to get back into the game when prices have stabilized. This is so important, because anyone at any time can get caught in a market down draft, and if you don't have stops in place, you won't have the capital to come back into the market to scoop up the bargains. Instead, your capital is trapped in your losing positions and, like a starving man staring through a frosted window looking from the outside in, you are forced to watch everyone feast while you starve.
There is no need to fear the market if you have a good risk management game plan. No matter what happens, you're prepared and ready to take advantage of whatever the market throws at you. You sleep easy at night because your good friend Mr. Stop Loss is "Johnny-on-the-spot" protecting your interests vigilantly. It's a truly freeing experience when you know where you're getting out … before you get in.
“Let the Game Come to You.”
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
