You cannot ride a bear.
Rodeo cowboys score points by staying on the bull as long as possible. Investors profit by doing the same.
But a bear is a completely different animal. No cowboy is crazy enough to saddle up and try to ride a grizzly. Yet investors try it all the time – and they get mauled.
Bear markets are not for riding. They’re for trading. That means you wait for severely oversold conditions before you buy anything. Then you sell when conditions become less oversold.
And you wait for severely overbought conditions before selling stocks short. Then you cover those trades when the market turns neutral.
It’s not a buy-and-hold environment anymore. It’s a scalping environment. So, play only the best setups and take profits quickly.
Last week was a terrific practice session for trading a bear market. Stocks started the week in oversold territory and drifted even further into the abyss during the Christmas Eve selloff. But if you paid close attention, you would have noticed that several indicators had fallen to historically oversold levels.
The CBOE Put/Call ratio, for example, normally ranges between 0.80 and 1.20. On Christmas Eve, the ratio hit 1.82 – meaning traders were buying 82% more puts than calls. That was the highest reading in at least a decade. And it was a sure sign that investor sentiment (a contrary indicator) was hitting a bearish extreme.
The McClellan Oscillators for the NASDAQ and NYSE (NAMO and NYMO) both closed below their lower Bollinger Bands and below the -60 level that often marks at least a short-term bottom for the stock market.
These were good clues that we were getting close to a bear-market rally.
Sure enough, stocks turned higher on Wednesday… and by Friday afternoon, the S&P 500 had rallied all the way back up to 2500. That was a 150-point gain – more than 6% – in just three trading days.
It was time to sell.
No, stocks weren’t expensive, and no, they weren’t overbought. But bear markets are fickle creatures. Countertrend rallies can reverse quickly, and profits can disappear just as fast.
It’s smart to sell stocks as they’re moving up and buyers are trying to get in. You may leave some profits on the table. But that’s better than holding out for the highest possible price and then having to exit the trade after the stock has turned lower and the buyers have disappeared.
If we’ve entered a bear market, and I think we have, then we’re going to see a lot more weeks like the last one. So we’ll have plenty of opportunities to profit. Just remember – we don’t ride the bear. We scalp it instead.
Best regards and good trading,
In today’s mailbag, subscribers share their praises for Jeff’s New Year’s Eve Market Minute…
This is my first time writing to you, having subscribed for two to three years. I just read your “Is That Why You’re Up at 1:00 in the Morning?” Market Minute. It was one of the best minutes that I have ever spent in my life.
Thank you for sharing… not only your market knowledge, but most importantly your love, love of the beauty of life, and love of your family and each other. I am looking forward to many early morning wake-ups with your upcoming Mastermind sessions. Wishing you a most healthy, prosperous, and happy new year.
Jeez, Jeff… the next time you send another email like this one, please warn me to grab a tissue! And I am not being sarcastic. I needed one. Luckily I had one in my coat pocket. I have two kids of my own that I will find a way to pass this truth along when they are old enough…
It is good to be reminded that one must earn the right to speculate by setting good foundations as well as education, another reason I follow you and am grateful for your analysis and clearly spelled-out reasoning as we navigate the fickle waters we call the “market.”
And another reader is looking forward to Jeff’s Mastermind…
I greatly appreciate what Jeff is doing… I’m very happy I could become a lifetime member of Jeff’s group. I’m only 92 and just retired but expect to have a lot of fun as well as serious study with Jeff’s program. My whole family looks upon me as a perennial student.
What are your trading goals or plans as we begin 2019? How are you preparing for the bear?
As always, send any other trading questions, stories, or suggestions to [email protected].
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