How To Thrive In Bear Markets – Part 1
For the next three days I will still be pretty limited in my ability to properly follow the market all the way out here in the Spanish boonies. Internet access is acceptable at about 10Mb/sec but my MBP’s 15” Retina display – albeit crisp and more than appropriate for regular tasks – hampers my abilities to properly run through my extended list of charts and market scanners. Although I am really not looking forward to returning to Valencia during a nationwide quarantine I am eager to jump back into the action in full force. For there are real fortunes to be made in the days, weeks, and months ahead. And this is the moment when you should start paying very close attention.
This post will be the first in a series aimed at preparing you for what looms ahead. Many of you younger traders have joined the trading community during a decade of unparalleled effervescence with nary any major downside corrections. Others among you may have been around during at least one market crash but may have grown somewhat complacent after a decade long bull market.
You see a major function of human survival has been the flexible adaptation to ever-changing environments. The executive circuits of the brain must therefore not only monitor and maintain current behavioral goals but also incorporate new goals and new rules.
Adoption to new circumstance can come in the form of a quick integration of previously acquired knowledge when, for example, a well-known stimulus informs us of a change in reward contingencies. In many cases however such updating requires new learning, for example when a new situation or stimulus is encountered for the first time.
After following the discourse in the comment section over the past week I feel compelled to dispel any lingering misconceptions that you may still be harboring in your dopamine laden cerebral cortex. It really doesn’t matter if a 20% down move is officially labeled a bear market or not. For heaven’s sake – get over yourselves and accept the cold hard truth that’s squarely staring us in the face.
First order of business for anyone considering to as much as look at a trading platform going forward is to embrace the blatantly obvious fact that COVID-19 was a long overdue catalyst that finally managed to burst a bloated bubble of a bull market that should have never even existed in the context of normal market conditions.
And by normal market conditions I am specifically referring to a situation in which Trillions of Dollars of fiat money are not being conjured out of thin air in order to socialize the losses of mega corporations. A prime example would be American Airlines which is currently begging for a government bailout after having squandered $15 Billion of its own cash on stock buybacks over the past decade.
Cry me a bloody river… if their stewardesses were at least hot and flirty I may consider it a good investment but as it is I hope AAL goes to zero and gets acquired by a billionaire with a majority share in a Ukrainian model agency. Anyway, I digress – the general point I’m trying to drill into your thick skulls is that we are not in Kansas anymore and that a set of new rules applies going forward.
- We are not anymore in a market in which throwing darts at the market will yield you a profit. We are talking about TSLA, TWTR, marijuana stocks, crypto currencies, and other nausea inducing instruments. They are all dead and don’t know it yet.
- 2020 should be called the ‘revenge of the nerdy retail trader’ as savvy/nimble participants will be able to run circles around fund managers, market advisors, ETFs, and the sorts. Most of them will be underperforming heavily in the years to come which opens up a host of opportunities in itself.
- Everything you know or have learned over the past 11 years is obsolete now. This is a completely new ball game. What we have witnessed over the past 3 weeks has completely transformed the marketplace which carries with it important implications on how we navigate the tape.
- Any short term recovery should only be viewed in the context of bagholders being given a rare opportunity to recover some of the massive losses they have incurred over the past two weeks.
- The Monday VIX close of 83.30 was the highest in recorded history. This was very different from a temporary bull market correction – and the impact of the current crisis will be felt for years to come.
- Long term fiscal damage has been inflicted across the board and across all sectors. The next earning season in April is going to be BRUTAL and will most likely trigger renewed selling pressure savvy traders will be able to take advantage of.
- Expect a final attempt at ‘fixing the problem’ by deploying multiple rounds of helicopter money. Whether or not that is a good or bad thing does not matter to us. What does matter is that the Fed will find itself unable to halt the deflationary forces on the horizon.
- Many market sectors are going to get wiped out or will end up being completely restructured. We are talking the airline industry, travel agencies, tour companies (good riddance), leisure & hospitality, casinos, the theater industry, the music industry, etc.
What Not To Do
Flushing your money down the toilet by attempting to run the same systems and same trading habits that may have served you well over the past decade. It won’t work under the current and future market conditions. You have been warned!
What To Do
It is essential that you acquire the skills required to not only survive but thrive in this new market environment. The first step toward doing that is to sign up as a member right here at Evil Speculator. Going forward I will be laser focused and not waste any time with feeding information to anyone unwilling to actively participate and support what I consider a haven of actionable and unbiased trading related information.
Tony and I are also planning a new initiative over at RPQ that will be available to all Evil Speculator members at a steep discount. What we currently have in mind is a trading room which will supply paint-by-numbers updates on our trading activity. To that end I also strongly recommend you sign up for a live trading account either at ThinkOrSwim or TastyTrade as it will involve options to a large extent.
Volatility Is Here To Stay
- We are heading into a global recession – most likely it’s going to be a full blown depression.
- Several waves of helicopter money and bailouts will be deployed. That means violent snap-backs after deep sell-offs. If you’ve been trading during 200 or 2008 then go back and look at your trading activity to re-familiarize yourself with how you either flourished or failed.
- Liquidity will dry up in a jiffy. If you run a company and expect cash flow issues then lock in a credit line asap.
- Stock buybacks are over and done for. Not even GOOGL, AMZN, or AAPL are going to buy back shares – cash once again will be king.
- Commodities across the board will suffer (oil is spearheading the sector).
- The service industry is DEAD in the water. And since a large portion of European and U.S. employees have shifted into the service industry over the past three decades hundreds of millions of people will be affected.
- Small companies without large cash reserves and inability to tap the bailout trough will be most affected. Expect a massive wave of layoffs followed by a large wave of bankruptcies.
- The final economic and human toll cannot yet be estimated, and success in trading as well as in professional life will require foresight and careful monitoring of the dynamics affecting all market sectors.
Shorting The Market
Since I expect quite a few noobs here at Evil Speculator let’s real qualify what we mean by ‘shorting the market’:
Shorting at its simplest definition is to sell shares of an instrument you don’t own. This may be confusing as selling something we don’t own may strike you as non-intuitive or ‘a bad thing to do’. But nothing could be further from the truth as short selling is an integral part of daily market activity.
Any shares we sell are in fact borrowed from a broker and sold with the intent on purchasing them further down the line, hopefully at a lower price.
- We buy EVIL @ $100/share.
- EVIL drops and we buy it back at $80/share.
- Net profit: $20/share.
- We buy EVIL @ $100/share.
- EVIL rises and we are forced to buy it back at $120/share.
- Net loss: $20/share.
Shorting Carries Unlimited Risk
Now if you’ve paid attention, especially to the second example then you already suspect one big issue with shorting stock. It carries unlimited risk! While a stock can only drop to zero on the downside it theoretically can run by hundreds or even thousands of points on the plus side. If you think that’s impossible just look at AMZN.
So if you’re short a stock that’s worth $10 for example and suddenly GOOGL announces that it’s acquiring the company for Billions of Dollars then you may find yourself in a world of hurt in the morning. Another strike against short stock positions is that they tie up large amounts of capital, which could be much deployed in a more ‘leveraged’ fashion (hint hint).
Another strike against shorting stocks for many investors is that it cannot be done with retirement accounts. So forget about shorting with your 401k or Roth IRA. And finally – and it’s one many traders are unaware of – short holders are required to pay dividend. Yes sirrreee – you are on the hook if you are short seller, so be aware.
Although shorting the market is a very tempting endeavor during a bear market there are clearly reasons why many would abstain from the practice. Fortunately there is a much better way and we will discuss it in detail in Part 2 of this series.
In the interim it’s important to stay positive, especially given all the gloom and doom that’s being peddled out there. Not that the news are necessarily wrong but a negative attitude will affect your ability to prosper and I instead want you to focus on restructuring your life and your business to be able to take advantage of the myriad of trading opportunities in front of us.
Maybe this tune will help. See you next time!