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Bear Market Profits - The Game Plan for Winning

Mar 14, 2008
Want to get rich in a bear market? Sounds crazy, right? Not to those who understand that bear markets move much faster than bull markets, and by switching to a few simple strategies, can make them as much or more than they earned in the prceeding bull market. It is actually quite simple to do, but will take a slight shift in your way of investment thinking.

A little background about bear markets first.

Bear markets rarely come on suddenly. You will have many warnings and equally many opportunities to protect your portfolio from at risk positions. You will also have enough time to position yourself in solid money making strategies that will continue to profit, even during the steepest of bearish trends.

The bear market signals will be subtle at first; earnings reports, general market news, and the overall economy will continue to sound good and healthy, but underneath that good news, an erosion of little followed market numbers will be taking place. They will not make financial news headlines, but their deterioration will be a key indicator to the bear trend looming just over the horizon.

Indices will still be reaching new highs or challenging old ones, and bullish talk will overshadow almost all other discussion. Ride the bull during this time for as long as it lasts, but keep raising your stops, you are going to need them fairly soon.

Keep an eye on the volume as new highs are formed. When the market is getting ready to turn, you will see volume start to wane with each new impulse to higher highs. Institutions, who had been buyers on every dip all the way up, will begin to take profits at new highs. Just a little at first, as they will be careful not reveal their selling hand. As more buyers continue to jump in to the bull they don't want to miss, along with expectations of even higher highs, institutional traders will use their enthusiasm to unload even more shares.

You will know the underlying deterioration is broadening by keeping an eye on the number of stocks making new highs. When indices reached those new highs, the number of individual stocks achieving that same status probably exceeded 400-500 a day. When that number begins to slip - perhaps down to the 300 range, consider it as another indication that stronger profit taking is underway.

All of this may continue for several weeks. But that early profit taking is eventually going to turn into panic profit taking, especially when economic news starts looking less brilliant. Suddenly, stocks will begin to break support levels and key moving averages. Watch for initial breaks on the indices below their 5, 30, and 50 day moving avearges. When each is violated to the downside, a wave of more precipitous selling will be triggered, and those averages will begin to trend downward as well.

Expect bounces at or near those key average levels too. No stock or market goes straight down, and computerized trading is set to do a little buying each time those levels are reached. Markets may stall or even bounce back from those averages, but each minor recovery rally in a growing bear trend will quickly turn into another selling opportunity for institutional traders. After all, smart money buys the dips on the way up, and then sells the rallies on the way down.

Before things get carried away in a downside sell-off, here's a few things you should always make sure to do. First, in your 401K or IRA, move into money markets or other safe havens like government bond funds. Cash will be king at this point, so do not be afraid to take those profits off the table when you first see the signs of the bear market developing. Then, use that knowledge to buy commodity stocks or commodity ETF's like the DBC, or IAU, or to buy inverse ETF's like the the QID, DXD, SDS, SRS, SKF etc. Each of those will actually move up when markets trend down. In other words, by owning those, you will be turning a bear market into a bull market and your portfolio profits will reflect your genius.

Those ETFs are bought and sold just like any other stock and don't require special trading knowledge or permission as do options. To show you their profit-ability, here is how they performed in the bear trend from October 2007 to March 2008: QID $34 -$54, DXD $45-$61, SDS $48-$68. Those were substantial gains earned while the Dow fell from 14166 to 11800 (as of this writing), and the NASDAQ dropped from 2861 to 2195.

There a several other things including option and futures strategies that can profitably be traded in a bear market, but I'll save that discussion for a future article. In the meantime, economic hard times should NEVER mean you have to lose money, in fact, while everyone is bemoaning upcoming bad economic times, it should be one of the easiest of times to strengthen and enrich your financial future. It's all a matter of how you choose to look at it, and trade it!
About the Author
Stephen Swanson is the author and publisher of the website: www.TheMarketForecast.com. Each morning Steve illustrates where markets are going, and writes a commentary on how to best profit in them right now.
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