Making and Protecting Money in a Bear Market

Hopefully a decline of some sort was not a huge shock after an 8.5% lift in two days. While I doubt something like this is unprecedented, it does not happen too often. In the context of a bear market that so far is of very ordinary duration, it was very unlikely that it was going to follow through yesterday.

I would generally expect more downside (but with a little less velocity!). If we are lucky, maybe only six more months before it turns up for real -- of course we may not be so lucky.

Many interviews we see on CNBC include a question about how to make money now. I've heard Hugh Johnson say this once or twice but most do not, since for most people in a bear market it's better to protect what you have than trying to find a couple of things that might do well.  As I have been saying, this does not have to mean zero exposure, but one way or another reducing exposure.

As I looked at how the things I use in portfolios did on Monday, they were of course mostly down a lot. Obviously having some double short (despite it not capturing the full effect yesterday), having a fair bit of cash and having sold a little on Friday meant not feeling all 382 beeps the SPX went down, which is fine, but the point is that the stocks I own are dropping plenty - but that is not what matters.

Obviously this is an argument for allocation, more specifically being willing to take defensive action in the face of a bear and not getting greedy at the wrong time. Not that there won't be tactical mistakes (I've poorly timed a couple of things of late), but that is the smaller picture. The big picture issue of this being a bear market has been quite important.

Speaking of the double short Pro Shares (SDS) that I own, in a session I sat in on at this conference I am attending there was someone from ProShares who took most of the questions. On Monday, SDS was up less than you'd hope for a down 3.82% day. I asked if the deviation Monday was bigger than the other day because GE was added to the no short list and GE has such a big weight (2.5%) in the S&P 500. He didn't know. Great. Maybe he did know but didn't want to say? If Exxon Mobil or a couple of the other biggies somehow get added to the no short list it might be time to say sayonara until the short ban ends.

Disclosure: Owns SDS

Comments

[investor88:]

Agree its a bear market, so keep powder dry [hold cash] with some allocation for trading long or short.

2008 Sep 23 08:44 AM

[SW Richmond:]

I have this silly guiding principle. I know it's silly to have principles nowadays, but my upbringing was faulty I guess. Anyway, the principle is this: if the regulators and other government types are so worried about a market that they have to change the rules to make it harder for the market to go down, then something is fundamentally bad in the market and you probably shouldn't put your money in it. If they have to do this on the fly, and seem to have trouble making up their minds about what to do, the danger to your money is greater. If they have to do this on the fly while arm-twisting the taxpayers for several Trillion dollars to pump up the market, then you should absolutely positively grab all your money from this market and run like hell.

Which is exactly what I've done. Months ago, in anticipation of the several Trillion dollar pumping part.

2008 Sep 23 08:58 AM

[gretsch:]

Having powder dry and spending money available will only give one the luxury of going shopping for fire sale items once this turbulence settles. Abide to the lessons of Graham,.. time will show this downward turn and investor uncertainty to be an excellent buying opportunity for those with patience. Turn off your TV and trust the large amounts of research you waded through before you chose your investments.

2008 Sep 23 10:16 AM

[ur2smrt4me:]

how about precious metals? currencies? commodities?

2008 Sep 23 11:38 PM

[TraderGreg:]

I heard that ProShares use futures. They do not short.

2008 Sep 24 12:21 AM

[Roger Nusbaum:]

more like swap than futures. the markets that facilitate the running of the funds are impaired due to short sale restrictions. this includes the derivatives of those markets.

2008 Sep 24 08:58 AM

[Jake2:]

Chatty. Unless you have something real to say, best to save your spit.

2008 Sep 24 12:36 PM

[goalposts:]

Roger, you and gretsch seem to think this is just another v-bottomed bear market - at some point a buying opportunity, just a matter of time till the market is back, higher than ever. So just lighten up your portfolio a litte bit so when the market inevitably goes back up, you'll recover your losses quickly and then it's onward and upward to bigger and better things! Or... could this be like the NASDAQ, only 50% of what it was 8 years ago, not to mention the NIKKEI 20 years after it's peak. There's no rule that says a market has to ever recover. Maybe this is not a good time to be a long-term buy-and-hold investor; anyone old enough to have any money may not have enough time left to ride this out...

2008 Sep 24 12:50 PM

[Roger Nusbaum:]

goalpost, for a little context...i have been writing about taking defensive action when SPX went below its 200 DMA and then getting back in when it goes above. that might happen soon or, as you say, not.

One theme I have been working with is that if this becomes a systemic thing in the US, ok, but there are other countries where this is cyclical and that is where we will need to look to put money.

2008 Sep 24 02:05 PM

[OldLimey:]

It's a false market - plain and simple.

2008 Sep 24 02:34 PM