Enis’s Macro Wrap – Bear Market Trading

by Enis November 19, 2012 7:44 am • Commentary

Bear markets and bull markets require different trading styles.

In bull markets, you should often just sit on your long positions and ignore the noise.  Most of the time, stocks are not moving much anyways, so trying to trade in and out usually just leads to frustration and lost capital, both mental and physical.  Better to just stay long and not worry about the headlines, no matter what your instincts say.

In bear markets, that “set it and forget it” style doesn’t work.  Most people are emotionally better suited to the “set it and forget it” style, which is why bear markets have such a negative connotation for most traders, even if they’re two-way traders (meaning they trade both long and short).  Bear markets require guerrilla tactics, darting in and out of both long and short positions.  They can actually be quite profitable if you don’t stick around on either side too long, as both up moves and down moves in bear markets are much larger than in bull markets.  But they’re more dangerous and volatile as a result.

I think we’ve entered a bear market in U.S. stocks.  And as such, guerrilla tactics are required.  We’ll be more likely to take off trades and initiate new ones in rapid fashion as sentiment shifts from hope to fear and back to hope.

Markets overnight:

  • SPX futures opened a few points higher on its Sunday night open, and is indicating a 10 point higher open in the SPX cash index as of 7:30 am EST
  • Asia was mostly green, led by Japan +1.5% as election hopes of more stimulus continue
  • Europe is up 1.5%, led by the financial sector +2%, as European Finance Ministers look to settle Greek aid terms this week
  • The dollar and Treasuries are lower, and commodities are higher (oil and copper both up around 1.25%), in classic risk-on fashion
  • LOW reported strong earnings, and the stock is up 4% in pre-market trading
  • Existing Home Sales data will be released at 10am