Mr. Market’s Bear Market Rallies?

Mr. Market’s Bear Market Rallies?

When markets go down, they often cascade.  Rarely a Crash (a loss greater than 10% within 24 hours) might occur, while other times it’s known as a “Waterfall” (a series of consecutive down days, none of which is greater than 10%).  A Waterfall is a loss of 25% in more in a few days or weeks and is no more than a Crash in slow motion.

During either type of decline, investors try to exploit the speed and downward direction with either short sales or put options.  Short sales involve Selling High FIRST, then buying back LOW, LAST.  A put option is a contractual right to sell at a fixed price within a certain period of time.  If you can sell IBM at $100 for the next three months and it trades at $80, you have a nice profit on a declining environment.

Stocks are not completely in concert with statistical expectations.

Stocks have been shown to follow a statistical “random walk” in which the daily variation is simply unpredictable.  Few make money by trading these swings.  Despite being “random”, stock market variations do not exactly mimic bell shaped curves.  For one, the LARGEST moves are typically precipitous declines, whereas up trends in Bull Markets tend to slowly grind higher.  Not always, however.  The Nasdaq recently had a Parabolic up phase.  History suggests it will suffer outsized losses as the BEAR engulfs the emotions of more and more traders.

The largest up moves occur as counter-trend rallies, during BEAR MARKETS, as listed below (https://seekingalpha.com/article/3896576-big-rallies-common-bear-markets).  Expect Mr. Market to use this tactic to prevent short sellers from getting too cozy.  He has a history of wanting to extract the greatest amount of damage from all the pigeons, including short sellers.

Volatility Spikes When Markets Swoon.

The volatility Index, or VIX, tends to explode during these plunges as both the fear component rises and mathematically the moves are larger.  Another factoid of note is how quickly gains disappear.  Those who don’t take their money off the table, get it taken off of them pretty quick.

The resulting “seesaw” between Mr. Market’s Bear Market “Rallies”, coupled with quickly disappearing gains, are part of the reasons market volatility increases during down waves.

Taking Profits Early is Better Than 1 Day Too Late.

Months of gains can be wiped out in days.

Take a look at the slideshow of the various major indexes.  Two things stand out.  One is that virtually every major index has given up either most, all, or MORE THAN all, of its ENTIRE 2018 gains.  In addition, many are approaching levels of MAJOR SUPPORT.

If it isn’t clear by now: “TAKE YOUR MONEY OFF THE TABLE BEFORE IT TAKES YOUR MONEY OFF OF YOU”.  Only the NDX has “currently” been able to retain any significant gains for the year and some, like the Value Line Geometric, are already DOWN.  There is nothing but peril in picking the top!  When you see the patterns, we’ve pointed out time after time, 10 months of gains can be totally evaporated in 10 days!  (For more information on these chart patterns and market declines, please see our recent article: Another October Stock Market Crash? https://markonomics101.com/2018/10/11/another-october-stock-market-crash/)

 

 

Please join our ever-growing mailing list and we’d be ever so appreciative if you would share this with your friends.  Please re-read our piece on protecting yourself from the potential coming calamity or you’ll wish you had (https://markonomics101.com/2018/10/09/how-to-survive-prosper-and-thrive-in-the-coming-bear-market-part-1/)

As a former hedge fund manager and trader, I made every single one of the mistakes I am bringing to your attention.  It cost me dearly.  Please use my mistakes to learn from.  That’s a whole lot cheaper than the alternative.

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