Heading Into a Bear Market?

Heather Cullen

Heather Cullen

In The Money

polar bear hiding eyes In The Money Heather Cullen

Is the Bear Market Coming?

What a difference 2 weeks make! In the last blog post, we noted that, after climbing strongly from early July, SPY had bounced off the Correction level. We were wondering whether it was just a temporary setback and SPY was going to continue up – or not. Well, we got our answer: definitely not.

The very next day it gapped down (never a good sign) and did not close the gap during the week, then on Friday there was a very definitive long red candle on high volume. Not a heartening way to end the week. The next week was much the same finishing with a long red candle on high volume.

In the Money Book Series by Heather Cullen SPY Bear Market

What’s going to happen this week?  Clearly, our golden cross is not on the horizon in the near term, but whether we will descend into a bear market or not will play out in the next couple of weeks. But right now, we are on the sidelines – oh, how fed up I am of writing that!

Not that it is terribly unusual. Over the last 25 years, following the ITM bull strategy would have seen us out of the market 25% of the time.

In the Money Book Series by Heather Cullen days out of the market

2021 was unusual in the we were in the market for the whole year, something that had only happened four times before, in 1995, 1997, 2013 and 2017.

I stress in the Bear book:

The ITM OUT signal is NOT the ITMB IN signal.

If we combined ITM with ITMB (the bear strategy) then we are still on the sidelines for 20% of the time, as the bear trades only took up 5% of the time.

As I say in the Bear book:

Not all these times out of the market turned into bear markets. More often they proved to be corrections or small dips, but we did not know that until afterward. ITM got us out anyway, just to be safe, and then we got back in after the danger was over.

So, we’re on the sidelines watching and waiting. How long will we have to wait?Let’s look at the most recent recessions:

Recent Recessions

The Covid bear was severe but lasted only 2 months, You can see that the market started moving up but we didn’t get the ITM IN signal until the start of June.

In The Money Heather Cullen Covid Recession

The Great Recession lasted for 18 months, and the market started moving up 3 months before it ended, and our golden cross came as it was ending in June 2009.

In The Money Heather Cullen The Great Recession

The early 2000s recession was different; stocks rose in the first 3 months, then fell, then started rising 3 months before the end.

But what happened afterward was also different: the recession ended but the stocks proceeded to extend the bear market.

In The Money Heather Cullen 2000s recession in situ

So, what can we glean from looking at past recessions? My take is that it is not predictable and that the stock market does what the stock market does and ignores the economists. Which is just as well really, as right now they are all busy arguing about whether we are currently in a recession or not. I’ve been researching and now know more about generally accepted definitions, academic definitions and the NBER than I actually want to know. My suggestion is that we ignore it as noise and watch the charts to see what is really happening.


Some reader’s questions from the last 2 weeks. If you would like your question answered then please fill in the Contact Form and I will post the answer here.

When backtesting, why did you not enter the trade on August 2010 but you did on August 1994? Aren’t these the same?

The August golden cross was not definitive; there was not enough ‘white space’ between the SMAs. The SMAs are converging but they don’t cross definitively. My books recommend waiting until you can see ‘white space’ between the SMAs and the backtesting was all done based on entering the trade the day after it was obvious. To me, there was no actual white space in August 2010, so I would have held off entering the trade until it was clearly there.  It didn’t become clear, then they diverged, so we didn’t enter the trade. It was clear in September, so we entered the trade.

In The Money Heather Cullen golden cross 2010

ITM is not about having a ‘black box’ trading system; it is designed for people actually following the charts on a day-to-day basis and seeing what they are seeing. Hence, I don’t say ‘if the SMAs are 5 (or 1 or 10) points apart then automatically do this”. It’s your judgement; if you are clear that there is white space then enter, if not wait a day or two until you are clear that the signal has completed. I recommend waiting until you are sure.

Re the 1994 golden cross, let’s look at the chart:

To me, it seems clear that there is white space between the SMAs. so entering the trade is indicated.

What should I be doing right now? Bull or bear?

Neither!! Right now, we are out of the market. We have to wait for a signal either a golden cross (and then we can enter a bull trade) or the market descends into bear territory, then we wait until the criteria for entering a bear trade are met. But right now, we sit on the sidelines, frustrated and twiddling our thumbs. Such is life!

How do you get options pricing going back 30 years? I can only get 10 years, nothing before that.

I answered this one in the last blog Q&A on 19 August. Here’s the link:  https://heathercullen.com/stock-market-quotes/

What software do you use to get the charts?

I use Hubb OptionGear. It’s powerful, but expensive, around $50 per month. I don’t really use all the bells and whistles, so I could probably get something cheaper, but I am used to it (I’ve been using it for almost 20 years) and it does everything I want – so laziness rules! 

I am not recommending that you get it unless you are really keen to explore it. If you are looking for free charts then Yahoo Finance is a good one where you can adjust all the parameters to get the chart looking how you want.

Why don’t you send us signals by email?

Writing about the stock market is fraught; you have to make sure you don’t fall foul of all the rules and regulations. I am not a financial adviser (I make that clear on this website and in the books) so I can’t tell you to buy this or that. I can only provide information for ‘educational purposes’ and show you what has worked for me and what hasn’t.

In the fortnightly blogs I advise what the market is doing in relation to the ITM and ITMB strategies, and alert you as to what you should be looking for if you want to implement them, but I can’t advise you when to buy or sell.

When is the sideways market book coming out?

Wow! I mentioned in the last blog that I was thinking of resurrecting my weekly trading system, and to email you if you thought it was a good idea. Lots of you evidently do. Thank you! Being realistic, I will have to update it and backtest it, and right now when the volatility is so high it is not going to work. It needs a calm sideways market. Let’s look at the VIX (volatility index) for this year:

Heather Cullen VIX 2022

When the VIX is under 20 then the market is generally considered calm – here’s what it looked like last time I did the weekly strategy:

Heather Cullen VIX 2014

You can see that it was well under 20 except for a couple of spikes where it briefly went over it a little.  That’s what we need for a sideways market strategy, and we’re not there yet.

There were some more questions, but this post is long enough! I’ll get to them in the next edition.

And Home Again . .

Well. My wonderful summer in Europe has ended and I am back in Australia. It’s not all bad! This is the beach 100m from my house.

Heather Cullen Leighton Beach

Beautiful. And you can probably figure out why I have all the tide and wave analogies – I do my thinking when I am walking. But I’m going to be back in Europe for next summer. No more winters! Ever!!


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