Let’s say you’re camping deep in the woods and you hear loud rustling noises outside your flimsy tent. You can’t know for certain what it is, but you can make an educated guess. It could be a bear!
Indeed, if you’re in many wild areas of the United States, it could certainly be a bear. Knowing for certain that it is, in fact, a bear is not the important goal here.
Think about it this way…
If you act as if it’s a bear and you’re wrong, it’ll be a “no harm, no foul” situation. Outside the fright and adrenaline rush, you’ll suffer no harm from your presumptive caution.
On the other hand, if you act as if it’s not a bear and you’re wrong… well, the conclusion could be grizzly.
Are We Really in a Bear Market?
No one knows for sure if we’re really in a bear market, whether it’s a “stealth” bear market that’ll only take down the weakest stocks… whether it will be quick and rather painless, or prolonged and devastating… whether an economic recession will or won’t follow — recessions only follow bear markets about half the time…
Again, it’s not important to know with certainty.
At this point in time, I’m acting as if we’re in a bear market because the risk of not acting that way is greater than the risk of acting too cautious. This is the modus operandi I’ve employed in my Cycle 9 Alert and 7 Figure Trader services since January…
In general, it simply means we’re been gradually adapting to the new, more bearish-biased environment. There’s nothing inherently bad about a bear market — for flexible, tactical investors, that is. It’s just different than a bull market.
Naturally, it does require a few adjustments…
My Bear Market Action Plan
Step No. 1: Accept it.
Denying the possibility — perhaps even the growing probability — that we’re in a bear market will get you nowhere. A flexible, open mind is the first step toward adjusting to a potential bear market environment.
Last week, I told you why it’s foolish to fight the market. Instead, you should accept that it’s bigger than us and learn to adapt to the opportunities it presents, even if they aren’t the opportunities we want or expect.
Step No. 2: Don’t buy the dips.
I’ve told you many, many times that I only recommend buying investments that are already trending higher. There’s no reason to buy the dips — particularly in this now bearish-biased environment.
It’s tempting to scoop up a good stock on a dip. But the principles of trend-following and momentum have proven well over time that you’ll do far better if you wait for the uptrend to reestablish.
Whether you use a simple moving average, as we do in 7 Figure Trader, or a more proprietary measure of trend, as I do in Cycle 9 Alert, I urge you to remain committed to only buying things that are already trending higher.
Step No. 3: Buy “alternative” assets.
As I told my Cycle 9ers:
By “alternative,” I loosely mean anything that typically moves in the opposite direction as stocks (particularly in bearish stock environments)… or, at least something that doesn’t have a strong correlation to stock prices.
Think: Treasury bonds, gold, the U.S. dollar, the Japanese yen or a “crisis-alpha” trend-following fund.
When most investors think about diversifying their portfolio, they think about spreading their capital across a large number of stocks… maybe even stocks from a variety of sectors… and maybe even throwing in some bonds, as a volatility dampener.
Yet, true diversification involves investing in assets outside the stock market.
Essentially, anything from the broad asset class buckets we call: bonds, commodities and currencies. (And I’d add volatility to that list, personally.)
Step No. 4: Short stocks.
Stocks tend to fall faster and further in bear markets than they rise in bull markets. That’s why shorting a stock can be so lucrative, if you do it right.
Shorting is a decidedly “tactical” endeavor, as I see it. You need a system for determining which stocks are most prone to a tumble, when to get into the short, and when to get out. You also need an investment vehicle that allows you to limit your risk — like options.
As I’ve shared with you before, one of the greatest advantages afforded by trading options is that you can fully limit your risk.
That’s not really possible when you buy shares of a stock outright. And it’s certainly not possible when you’re selling short shares of a stock.
But buying a put option (a bearish bet against a stock) is just as easy as buying a call option (a bullish bet). And in both cases, you hold a position with fully-limited risk. And put options can be really cheap… allowing you to invest and risk several hundred dollars to gain the opportunity to earn several thousand dollars.
It doesn’t get any better than that!
And since for most of this year I’ve been acting as if we’re in a bear market. Of course, I will adapt as needed… I’ve just been finding the best ways to play the market’s downside.
In Cycle 9 Alert, I found three short-stock opportunities that have handed us gains of 50% or more. One of them even ran for a nice 265% profit!
Whatever you do, I urge you to keep an open mind and adopt the flexible “trader’s mindset.” If nothing else, you should at least mentally prepare for a potential bear market ahead.