How to Trade the Bear Markets

“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.”

– Warren Buffett, Chairman of Berkshire Hathaway

And neither should the ongoing bear market bother you if you have the right strategies in place. This is because bear markets are nothing new – there have been 39 different double-digit percentage drops in the S&P 500 alone since the beginning of 1950. The DJIA and Nasdaq Composite are no strangers to double-digit declines either. But following a dismal 2022, when Wall Street witnessed its worst performance since 2008, stock indices registered double-digit growth in 2023. The S&P 500 rose 24.23% , the Nasdaq soared 43.42% and the Dow Jones gained 13.8%.

Although the last 12 bear markets were accompanied by a recession, lasting anywhere between two and 18 months, this time around, things seem to be different. The major US indices soared through 2023, continuing along the same lines in 2024, with the S&P 500 up over 8%, Nasdaq Composite almost 10% and the DJIA close to 3% YTD, as of May 2024. In fact, the Fed released a new set of projections for the American economy at its March policy meeting, with expectations of stronger economic growth in 2024, 2025 and 2026 than previously anticipated. Fed Chair Jerome Powell stated , “The economy is strong, the labor market is strong and inflation has come way down.”.

Source: Schwab Center for Financial Research with data provided by Bloomberg

Trading Strategies for a Bear Market

“If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing much about it.”

– Charlie Munger, Vice chairman of Berkshire Hathaway

The first thing to remember is that although there are indications that the current bear market is still to find its true bottom before recovering, the timing of the recovery is uncertain. And, second, smart investors will continue to find the best investment options through this period, rather than trying to time the recovery. Here’s a look at some strategies that are popular among experienced traders during bear market conditions.

1. Keep Your Investment Goals in Mind

You need a plan that will help you not just survive the downturn but also save for near-term and long-term financial goals, including retirement. This means paying attention to how you structure your portfolio to meet these goals. For instance, you cannot afford to risk the capital required for near-term goals. At times like this, some traders look for opportunities in assets that could potentially be seen as safe havens. On the other hand, capital that you might not require for another five or more years could be put to work on assets that are likely to offer more trading opportunities, albeit at a higher risk, such as stocks.

2. Diversify Your Portfolio

This is the time to review your portfolio and make sure it contains a good mix of assets. For instance, there are market segments that tend to be downturn-proof, while others are hit much harder. So, while investing in the stock market, some traders will include consumer staples and healthcare as part of their strategy, as the demand for which is unlikely to decline. Also, cushion yourself with other asset classes, such as commodities, such as gold and silver, required for the manufacturing of various technology products. Agricultural commodities and energies could also help cushion your portfolio.

If you’re interested in the forex market, consider adding safe haven currencies to the mix, such as the US dollar and Japanese yen. Another popular choice is to include dividend-paying stocks, so that while you hold on to stocks through the bear market, you still get some passive income via the dividend payouts.

3. Make the Most of Bear Market Rallies

“I make no attempt to forecast the market—my efforts are devoted to finding undervalued securities.”

– Warren Buffett, Chairman of Berkshire Hathaway

A bear market doesn’t mean a constant downturn. There are short-term spikes and rallies that alert traders can capitalise on. Typically, a rally is considered a spike of at least 10% from the recent asset price lows. However, remember that these price changes occur over very short periods and reverse quickly. Also, such short-term rallies do not usually signal the end of a downtrend. You need to ensure your strategy here is well thought out to minimise or avoid losses.

One way to capitalise on such rallies is to consider short-selling. For instance, a price decline of 20% is officially considered a sign of bear market conditions. This could prove to be a good time to short-sell before the price continues to drop. However, remember that the price could suddenly move in either direction. Also, it is difficult to predict how long the price will continue to fall.

4. Trade Indices and ETFs via CFDs

Indices and ETFs are a great way to diversify your portfolio with a single investment. Since they contain a basket of stocks, they offer a good way to track the performance of an entire market. For instance, the FTSE 100 consists of the top 100 UK-listed stocks with the highest market capitalisation. Now, an ETF will look to replicate the performance of such indices and can help you gain diversified exposure to the UK economy.

A popular way to trade indices and ETFs is via CFDs, since you do not need to actually own the underlying assets you are speculating on while trading contracts for difference. This is a derivatives instrument that allows you to make the most of both rising and falling prices, offering trading opportunities even in bear markets. But as with all trading, you must ensure you educate yourself on these assets before you trade, as losses can exceed deposits.

Key Takeaways

• Bear markets also offer trading opportunities, since they are characterised by short-term price rallies.
• It is important to consider both near-term and long-term financial goals while making trading decisions.
• A diversified portfolio enhances your chances of surviving even prolonged downturns.
• Keep an eye out for short-term price spikes and capitalise on them before the downtrend continues.
• Consider trading indices and ETFs via CFDs to make the most of both rising and falling prices.

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