10 Tips for Clawing Ahead in a Bear Market

Although the Dow and S&P 500 have not yet met the formal definition of a bear market, which is a drop of 20% or more from recent highs, this is clearly a bear market for much of the market and has been so for a while. The fact that the senior indexes do not reflect what has been going on under the surface is one of the aspects of this action that has made trading particularly difficult.

Since 1928 the S&P 500 has averaged a bear market about every four years, but most investors are never ready for them and go through the same issues every time. Much of the pain of the current bear market has already been felt, and it has been bad enough for long enough that many traders and investors have given up. This discouragement is a natural part of the process and will continue for a while. Here are 10 tips to help you navigate through this bear market:

1. It’s always different. While the cycle of bull and bear markets is inevitable, each bull and bear market has unique characteristics that must be considered as you develop a trading or investment style. There is no one-size-fits-all strategy for each bear market. One of the major differences in the current bear market is that it has been very uneven. Speculative areas of the market started to top out way back in February 2021. Other elements hit a top in November. It was not until recently that the big cap technology stocks finally cracked. This is important, because it means that eventual recovery is likely to be uneven as well. This bear phase is unique, which means we will have to constantly shift our strategy as it unfolds.

2. Stop the bleeding and break the inertia. The biggest frustration of any bear market is that we do not sell quickly enough, and stocks that appear to be safe turn out not to be safe. The typical reaction is to freeze and think that it is too late to do anything. You have to break that mindset, and you do that by selling something. Stop looking for a reason not to sell and dump something. Perhaps it will be absolutely the wrong time, but it is surprising how this will shift your mindset and allow you to act. Inertia is your enemy in a bear market.

3. Mark to market. One good way to regain control of your stocks is to forget your cost basis. Treat your stocks as if you just bought them that day and then set new appropriate stops and stick with them. Forget what has happened in the past and focus on what you can control today.

4. Stop predicting. The best way to handle a bear market is to admit that you have no idea when it might end. The business media tends to put forth predictions as it is the sort of news that sells, buts it is just a guess. No one knows how things will develop. The only truth is the price action, and that is what you need to watch more than anything else. Do not be hung up on trying to guess when the bear market might end.

5. Fundamentals do not matter. One of the main reasons that traders hold onto stocks in a bear market is that they are confident that the market will appreciate that they are exceptional values. Unfortunately, bear markets do not work that way. Valuation becomes irrelevant, and there is always a liquidation phase when everything is sold regardless of their merits. Eventually, this creates exceptional opportunities, but it can take a long time for the market to return to a “stock picking” mindset. Focus on price action rather than fundamentals until the market shifts back to a ‘stock picking’ environment.

6. Play counter-trend moves but be very clear about time frames. The biggest bounces occur in the worst markets, and there can be some excellent upside trading if your timing is good. But it is of paramount importance that you have clear time frames and that you do not let a failed trade turn into a long-term investment. This is what causes some of the worst pain of bear markets.

7. Stay patient. Bear markets will wear you out. A general belief is that bear markets tend to end on a huge drop caused by panic selling. The reality is that bear markets end with a whimper and not a bang. Bear markets are so painful because they drag out much longer than anticipated, and many people give up out of frustration and despair. Stay patient. There will be a natural inclination to want to believe that the bear market, but it pays to stay skeptical.

8. Better late than early. Trying to catch the exact bottom is almost a competition when dealing with a bear market. Everyone wants to be the genius that calls the exact bottom. The problem is that it is only possible if it is done prospectively. You can only predict the exact low if you do it while stocks are still declining. The far safer approach is to wait for some strength and use recent lows as a stop-out level. You will not buy the exact low like the people who try to buy into the teeth of a decline, but you have defined risk, and the potential to catch upside momentum starts to build.

9. Rebuilding takes time. After suffering brutal losses in a bear market, we are inclined to try to trade more aggressively to recover losses quickly. This is a recipe for disaster, as taking on more risk when the market is still in transition can easily backfire. Once the market starts to recover, the focus should be on incremental gains. You will recover your losses by slogging away day after day as the market improves.

10. Maintain a positive mindset. The most important thing you can do during a bear market is cultivate a positive mindset. The ugliness of a bear market always leads to new and exceptional opportunities. It is inevitable, and we must be patient, vigilant, and ready to act as conditions change.

This is a miserable bear market right now. Embrace that, and prepare yourself for the bull cycle that lies ahead.