Surviving the bear market.

A few people asked me how to make money in a bear market. It’s not as easy as it is when everything goes up, and you can jump on any hot stock and ride it to the moon (think CROX, VMW, HANS, LULU, AAPL, etc a few months ago.
My number one rule is never to keep any long positions overnight. There are almost always bad news in the morning, and when that happens does not matter how good of an equity you are holding – it will get killed with the rest of the market. That’s not to say you should never have a long position at all… in fact as it often happens selling gets overdone for some stocks and picking up something in the morning and selling in 2-3 hours for 5-10% profit is always a nice way to start a day.
Short the momentum stocks that lost their momentum. Right now there are too many of those in this market. The only caveat – buy out of money calls to protect your shorts. You don’t want to get killed if the stock starts running again.. and on good news there will be these pops.
This is why is like to short or buy puts on the indexes. It’s much safer to assume they will go down over 3-4 sessions. SPY, QQQQ are the obvious indexes to play with.
I am saving the best for last. There are so many Ultra short ETFs now that let you bet against an industry without a risk of options (expiring) or shorts (blowing up and taking all your money, having to cover). These ETFs move 2% up for every 1% down for the underlying indexes, My favorite Ultra short ETFs are:
- SKF (Ultra short financial). It’s safe to say that there will be more selling in that sector and I bet someone big will go under.
- FXP (Ultra short China). That bloated market is bound to implode.
- QID (Ultra short Nasdaq 100). Technology seems to have followed the financials in the last couple of month.
As you can see there are plenty of ways to making money in a bear market, just have to be more careful – eventually the bear market will end.. you can’t stay bearish forever.

Case for a bear market.

At this point I believe the bull market is coming to an end and the bear market is just beginning. I have exited almost all my long positions and loaded with Ultra shorts and puts. I do hope this will be quick and painless, however my expectation is that for the next 6 months we will see a lot more bad news.

There are too many reasons for this, but I believe the primary cause is the subprime meltdown. Here is my reasoning.

1) There are anywhere between 1.3 trillion and 2 trillion in subprime mortgage. I have seen both a lot of numbers, but lets say it’s 1.5 trillion.. on a low side. Today’s market price of this is about 68c on a dollar. check here for the most current . Again, this is the AAA, the highest rated subprime (now below junk rating). So at the market rate we are talking about 500bln in write downs. So far we had about 50bln, so we are in the 1st inning. Every time a new wave ot write downs is announced the financials tank (and it’s about 19% of the whole market) and they take everyone else for the ride.
2) Can the Feds save us? They did save us before, emergency rate cut, plus another .25 point. We rallied on both news. But look what it did to the commodities (dollar denominated).. oil is approaching $100, gold is through the roof, silver, metals. People and institutions are shifting from equities to commodities. Dollar is being destroyed. I think FED is done cutting for a while
3) When did the bear market start. DOW, NAS, S&P are all still up for a year.. if measured in $ value. But what if we look at a real value (basket of currencies). Dollar is down vs. Yen, Euro, Canadian $ – every major currency. So in real term the market is DOWN for the year. Lets take S&P and EURO. S&P is up 4% for the year.. $ vs Euro is down 13% – real performance down 9%.
4) What about the consumer? Consume did pull us out of last slump.. I would argue they did it because they saw the real estate values increase, so it was easy to borrow money ( think all the lines of credit – HELOCs) taken out. Now that real estate prices are falling and lots of people upside down on their home they will be a lot more cautious in their spendings.

The feds just came out today and reduced growth forecasts. I hope we will avoid recession, however I will stay short in this market for a while.