For nearly
a decade now, investors have been wallowing in a bull market. Of course, this
is a good thing. But we have to remember that a bull market has a beginning and
therefore has an end. It’s much like a bear market, which comes and goes.
Read also: Bull and Bear Market Explained
The idea is
to earn what you can while everything’s upbeat. However, you must also secure
your future against a bear market by doing these clever things before the bull
market ends. Let’s get into the meaty portion.
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How to
Recognize the End of the Bull Market
Early this
year, the Dow Jones Industrial Average topped 25,000 points and then smashed
26,000 just one week later. That didn’t
last a long time, though. February saw a market correction, as predicted by
many analysts.
According to
Mark Morley, a financial planner from Oklahoma, no one can certainly predict the
ups and down of the market. So that leaves you with the choice of staying
invested, armed with a long-term plan.
But, is
there a way to recognize the coming of a bear market?
See Bear Markets: 4 Ways to Ride Out the Storm
Stellar
Valuations Do Not Equate with Selling Opportunities
Even if you
see large gains, along with the surprising length of the recent bull market for
stocks, you cannot just decide that it’s time to sell.
Many analysts
advise traders like you do extra research in times of bullish sentiment. Before
you sell, find clues that indicate a longer upside in the future. This can be
especially true if you don’t see any signs of trouble ahead.
Signs to
Watch
For you to
recognize the end of the bull market, you got watch out for crucial signs.
Experts suggest
that skepticism is one thing to
watch during a bull market. According to Ihor Dusaniwsky, the head of research
at a financial analytics firm, many investors have started to increase their
bearish bets during the past couple of years. This indicates that these investors
are expecting a huge market sell-off.
This is what you need to do: the higher the market climbs, the
more you should pay attention to your shorts. You have to see to it that you have
enough hedging positions from ETFs or beta stocks. This serves as a safeguard
against huge losses from your longs during a detrimental market crash.
You also
have to closely monitor leading economic
indicators. These indicators include
consumer sentiment, capital goods orders, and manufacturing orders, among
others. If the bull market will soon end, you’ll see that these indicators are
starting to decline. That’s a good time to prepare for the incoming market correction
or market crash.
You may
also try to reduce the number of your winning stocks, while also investing in
short-term Treasury bonds—plus other high-quality fixed-income assets.
Having a
Plan Means Security
We know
that it’s an enormous task to track market tops in real time. With that in
mind, there’s a lesson to learn from long-term investors.
Long-term
investors—the smart ones—usually have well-constructed and diversified
portfolios. That happens to be the most important thing, and the most basic, in
investing. Do not panic. Remember that the
worst thing you could do is to be emotional during a bearish market.
A smart
thing to do is to follow your investment plan, even if the headlines tell
otherwise. There’s a huge possibility that you won’t suffer from price drops
more than from your emotional reaction. Keep
a cool head.
If you keep
it together, it will be easier to construct a bear-market-proof plan. Strive hard
to be rational even if the sense of impending doom is great.
Once you’ve
created such a plan, you can sit back and relax and watch how the great bull
market will end.
Learn more! Read: Are You Trading or Gambling?
How do you
keep your head clear, by the way?
According to
experts, there are tons of ways to be levelheaded during the end of the bull
market.
·
Shut your ears from the hype. You can blame different things and
run around shouting, “the end is near!” But those things won’t help. The best
course of action: research and prepare.
·
Do not swallow news up. It’s good to be updated on the most important
news, but not to the point that you become paranoid. You will most likely
associate everything to a market crash.
·
Remember this: even if the markets have
depressing points, the trend is generally always upwards.
Preparation
1: Talk to the Bears
Since we
have tackled skepticism, one smart thing to do is to discuss this with bearish
traders, if you can find one.
Some traders refuse to suspend their
bullishness. Thus, it’s hard for them to listen objectively and cleverly to
bearish ones. And if they ever managed to actually discuss with bears, the
bulls usually complain of being paralyzed. This is because in reality, both
bulls and bears have strong talking points.
Those talking
points come from fact-checked statistics and analyses, which makes deciding to
be bullish or bearish even more difficult.
If you feel
compelled to listen to the bears and you cannot come up with strong answers, then
maybe it’s high time you re-evaluate your market outlook, if only to invalidate
bearish sentiments.
Preparation
2: Hunt for “Uninteresting” Companies
As implied
above, another smart way to brace for a bear market bite is to swerve away from
risky stocks.
What you
want to do is to find companies with strong balance sheets—those tagged as “boring”
by aggressive investors. These companies grow with the market during bullish trends,
but they lose a lot less when the market spirals down.
Let’s take
a retail company for example. This retail company, to everyone’s surprise,
gained a lot during the financial crisis in 2007 and 2009. It gained 7% even
when the S&P 500 staggeringly dropped 57%.
Such companies’
long-term returns come from dividends. They can be unexciting and uninteresting,
but you wouldn’t want to gravitate towards dynamic companies if your gut
feeling tells you that a bear market is just around the corner.
Meanwhile,
if you think the bull market will continue its reign, better check out the
strategies below.
Learn more about dividend stocks. Read Dividend Stocks: Illusions and Misconceptions
Trading
Strategies during a Bull Market
The following
are the most common trading strategies that many investors use during a bull
market.
Buy and Hold
This is
arguably the simplest and most popular strategy. Passive investors love this. The
goal is to gain from the bull market, which should sustain its rise to make the
buy-and-hold strategy work.
Once you
place a long position, you just let it be until you find clear-cut and definitive
signs of market reversals.
Increasing
Buy and Hold
This one’s
for a more active and more aggressive trader. The goal is to add more to your holdings
and profits while the bull market lasts.
You buy
additional shares each time the stock or mutual fund’s price increases. The amount
of increase should ideally be a fixed price. To illustrate: you buy additional
shares in a stock whenever the stock’s price increases by, say, $2 a share. You
buy additional shares of a stock you first bought at $50 a share when it
reaches $52, and another additional share when it reaches $54, and so on.
Lastly, you
continue doing this when the price hits predetermined level—or when you think
that the market has already topped out.
Retracement
Additions
Other investors
are more aggressive, and they try to make substantial additions to their
holdings. They seek for the most advantageous prices, too.
If you’re
that kind of investor, you should also watch for retracements or downward
corrections throughout the whole bull market. When retracements happen, you can
buy more shares on the slide, assuming that the bull market will go back to its
upward trajectory. If all goes according to plan, you got yourself additional
profitable shares.
Full
Swing
The most
aggressive investors practice this strategy, taking advantage of the
oscillating movement of the market.
If you do
this, you try to profit from trading with the swings of highs and downs within
the bull market. You use buying and short-selling positions as the market moves
back and forth, up and down.
Further,
you have to be thoroughly involved in watching over charts and in monitoring the
market. You have to obtain the advice of market analysts or use your own
charts. Most traders who do this focus on momentum oscillators, which tell them
overbought or oversold states with support and resistance levels.
When you
see signs that the market has temporarily exhausted its momentum, you exit long
positions and begin short-sell positions. Doing so will aid you earn from a
downward correction. If technical indicators tell you that the correction will
soon go away and the bull market will take the spotlight again, you close out
all your short-sell positions and start new buying positions.
You do this
over and over again, seeing that there could be an overall, long-term uptrend. You
can take bigger buying positions than selling positions, but you have to weigh the
trades in the direction of the bull market.
Related: Pros and Cons of Swing Trading
In the
End
The most important
thing to remember during any kind of market is this: be prudent and be ten
steps ahead of the whole market. You cannot predict things with 100% accuracy,
but you can always make an educated guess. Good luck with the next bear market!
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