Prepping for the Next Storm

 

Prepping for the Next Market Storm
Prepping for the Next Market Storm
by Mark McDowell

Around this time of the year, residents in Florida receive friendly letters from our local county governments reminding us to prepare for the next hurricane season — which is still a few months away. They advise us to stock up on food and water, think about protecting our home, plan our evacuation route, and so on.

Of course, we don't know if or when a hurricane will hit Florida this year but the officials remind us that stocking up on supplies and planning is far, far easier to do now, well ahead of the storm season. Once a hurricane is forecast to make landfall, all that the unprepared folks can do is react and scramble. Without a plan and at the last minute, looking for food, preparing your property, and trying to leave town are all difficult at best and very, very stressful.

As a full time trader and an instructor for the Van Tharp Institute, may I provide you with a friendly reminder? The next bear market is coming — I don’t know just when it will arrive, only that it certainly will. You can prepare for the next storm in the market now with the benefit of a clear head and time — or you can react and scramble as best you can once it finally happens.

The best time (the only time?) to prepare for a bear market is before it occurs. Waiting until the major indexes are down 5—15% to decide what you should do will leave you flat footed and stressed. Bear markets can develop very quickly and while most people just want to minimize the damage, bear markets also present excellent trading opportunities — if you are ready. Those are the two ways that I think about the Trading in a Bear Market workshop (May 7—9) - preparing for a contingency and preparing for opportunities.

How do we know that a bear market is coming and when it will arrive? Weather experts use models to forecast probable paths for each hurricane. At the Bear Workshop we review several expert models for tracking market types to identify when the bear market may begin.

Hurricanes contain very intense wind, rain, and lightning that distinguish them from normal storms. Likewise, bear markets contain much higher volatility than most “normal” market conditions. Systems and strategies designed for normal or quiet volatility are likely to perform very poorly in a bear market. You can learn, however, a number of ways you could benefit greatly from that increased market volatility.

Hurricanes don’t start out as hurricanes but rather as low pressure systems that then evolve over time and weather experts understand the process of their development. Likewise, people often refer to bear markets as an event — as one thing. In reality, however, bear markets develop or evolve through three distinct stages. The first stage occurs when volatility starts to increase and stocks have begun to decline. This is the time to shift out of trading systems designed for bull or sideways markets and to begin preparing for much higher volatility. For this first stage of the bear, we discuss ways to hedge a portfolio to protect your capital as the most basic means of defense. We also review strategies for going after trading profits during this stage using ETFs and options to capture profits as the market drops.

The second stage is the main part of the bear market — the stock market declines significantly and volatility spikes up. Consider this: during the last bear market in 2008, the S&P 500 (represented by the ETF SPY) had daily ranges of 7—10% intraday. If you lived through that market, you may remember volatility but did you realize it ever got that high on an index for the 500 biggest companies around? We present trading systems and strategies designed to work when volatility is this high.

The last stage of the bear market is characterized by declining volatility and it presents opportunities to position your portfolio for the return of the bull market. We review two specific strategies that use options and ETFs to capture profits as volatility declines. We also present a trading system designed to buy stocks as the bear market ends and the next bull market begins.

Bear markets don't come around that often. Most of us don't have the time or experience to prepare our own trading systems to take advantage of the opportunities a bear market presents. Why sit on the sidelines and just wait for a bear market to end when you can trade through it and be even better positioned for the follow on bull market? Plan to learn how by attending the next Trading in a Bear Market workshop.

 

 

 

 

 

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