Trading the Bear Market

Heather Cullen

Heather Cullen

Author
In The Money

Trading the Bear Market Heather Cullen

So the Bear Won!

There’s no doubt about it: we are in a bear market. The special edition of the blog on 22 September gave an alert that SPY was in bear terriory, and it has been downhill since then. All three major indexes are in bear territory, albeit starting on different dates.

Which bear are we talking about?

There are 3 major indices that are watched, and they all entered the bear at different times during this year.

First into a bear market was QQQ (the Nasdaq ETF). It flirted with a bear market way back in March and had a one-night stand, rebounded up to the 200-day SMA then dropped again, entering the bear on 26th April. It has stayed there, except for a brief respite in August. It is now at its lowest point so far, having dropped 34% from its highs in late 2022

QQQ Bear Market Heather Cullen

The next into bear territory was SPY. In mid-June, it dropped through quite definitively, then vacillated for a month before climbing back up to the 200-day SMA. It then promptly dropped again, entering the bear market on 22nd September, and has been dropping since. It is down 25% since its highs at the start of the year, and back to where it was in August 2020.

SPY Bear Market Heather Cullen

Lastly, after nearly getting there in June, the Dow dropped through and closed under the bear market threshold on the 26th September. It is now down 22% for the year.

Dow Bear Market Heather Cullen

Suddenly, the financial journalists all started proclaiming ‘We’re in a bear market!’. In In The Money: Bull Market Strategy I go through why the Dow index should have been retired by now as is not indicative of the entire market, and why the S&P 500 is a better index. Unfortunately, this seems to have escaped the understanding of many financial journalists. It is important to note the relative drops as of today:

  • Dow: -22%
  • S&P 500: -25%
  • Nasdaq: -34%

VIX - Volatility Index

To complete our understanding of where the market is right now, lets have a look at the VIX.

For most of the year is has been above 20. Below 20, the market is considered to be calm with little volatility. We’ve had very little calm this year! The VIX is high but not hugely high right now, but notice the 200 day SMA: it is trending up.

To put things in perspective, let’s look at the monthly VIX for the last 30 years:

Vix 30 years Heather Cullen

Being a monthly line chart, it smooths the extremes. For example, it doesn’t show that at the height of the GFC Bear and the Covid bear the VIX reached over 80, compared with which we are not particularly volatile.

What’s the bear’s name?

It strikes me that other bears have had names – the ‘Tech Wreck’, the GFC Bear, The Covid Bear, The Great Depression. I wonder what this one will be called? I can think of an obvious name, but I am determined that this blog will not venture into things political, but you may have some ideas!

Can we learn from the GFC?

I have just been reading the chapter on the GFC in In The Money: Bear Market Strategy. Yes, it seems funny reading my own book, but I know that it has the information that I need and that I can’t keep all the details in my head! It strikes me that there are some parallels. I’ll just show the chart from 2008 and leave it to you to work out what they are!

SPY GFC Heather Cullen

So what are our options worth now?

The option (put) that met all the ITMB criteria was the 500 strike Mar 17 (2023) expiry. If we had bought it at $123.59 we would be sitting on a 15% profit as the ask is now $141.73. Nice.

However, we noted that that was expensive and we needed over $12K to get into the trade, and that a cheaper (but riskier) option would be the 430 strike, same expiry. If you had bought that one at $56.29 then you would be sitting on a 28% profit as it is now $72.16. Even nicer.

But remember, this option is much riskier. If the trade had gone against you then you would have had a bigger loss.

 

 

What did I do? A bit of both actually. Of the money I allocated to bear trades, I put 80% on the DITM 500 option and 20% on the ITM 430 option.  Both have done very nicely to date.

Cautions & Warnings

While I feel less uneasy than I did when I wrote the last post, remember that we are in a bear market and bear markets are volatile. You have to monitor every day, and be ready to jump out when you get the signal. To know what you are looking for, I suggest that you reread the section on signals in the ITMB book – I have, several times!

Careful what you wish for

As I mentioned last time, I am always uncomfortable when trading a bear market. It feels wrong to hope that the market goes down because you know that other people are being hurt.  You probably feel the same.

But we are just observers, we are not causing a bear market by trading it. The market does what the market does, and not trading it would not make the slightest bit of difference. I salve my conscience by hoping that maybe I have helped people by showing them how to avoid losses when a bull market ends and how to make money in a bear while waiting for the bull to come back. Well, I hope so anyway!

And . . asking for a favor

If you liked the books I would love a review on Amazon.  I would really appreciate it for all or any of the books. Of course, if you didn’t like them then I would prefer that you told me directly!

Here’s the links:
In The Money: Bull Market Strategy

In The Money: Bear Market Strategy

In The Money: Compare Options Strategies

In The Money: Australian Edition

Thank you so much!

Heather Cullen In The Money Signature

Polar Bear photo by Hans-Jurgen Mager on Unsplash

Heather Cullen

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