Lessons Learned Trading Bear Markets

Trading bear markets is tough.  This post is about me finding a strategy to short bear markets, in a timeframe suitable for me.

My original plan was to simply short and hold into the depths of the bear market.

I had not counted on how sharp the bear market rallies would be:

Source: Wifey

I haven't covered my shorts, and I added to them last week.  But the last vicious bear market rally has given me some sleepless nights.  My shorts moved from a 70K profit to a 20K loss in 2 months!  I learned that prune juice helps constipation.

My timing wasn't great.  The chart below are my shorts (pink arrows) and coverings (blue arrows):

I can't trade day-to-day in the short term.  And its uncomfortable hodling shorts for the long term.  So I need to trade in the medium term - around the bear market rallies.  How can I do this when bear market rallies are unpredictable?

• Simply wait for the BMRs to occur, and as they do, add more.  Add a little at a 5% rally, more at 10%, more at 15% and some at 20%.
• If the BMR doesn't occur, don't short.  Take the attitude that I'll short if the market gives me the opportunity, but I don't have to.  I always have the choice to happily sit in my dividend stocks and cash, waiting for valuations to go low enough or for the macro outlook to change.  We get the worst results when we feel compelled to do something.
• Take some profits when it feels great.  When the market has dropped like a rock for several weeks, your profits are exploding night-by-night, and you are the king of the world...take some profit - maybe 1/3rd or half of my short positions.  I guess everyone learns this instinctively as they trade.
• Don't look at my percentage allocation (eg: shorts vs longs).  Successful short positions shrink, so at the bottom of a crash, they'll be small positions, just when I should be covering (making them even smaller).  Don't have a "target allocation".

We may be halfway through the bear market now.  As we get closer to its end, hodling shorts becomes a really bad idea.   I need to trade around the bear market rallies.  And start taking profits.  Wait for the next leg down...

With the last few days drop, my shorts are now profitable again.

Maybe this bear market rally ended last week:

Source: Keith McCollough