Whew, what a week. Assets across the board got smoked, and the Nasdaq officially ended the week in bear market territory. For crypto traders, Bitcoin, Ethereum, and some other crypto assets have been cut in half, or more. Despite the S&P 500 being down only 13-14% from highs, only 25% of all listed stocks are above their 200 day moving average. It's safe to say that after the massive bull run in nearly everything we've seen over the last two years, we are now officially in a bear market.
Because this may be the first bear market experienced by many in our community, we thought it would be helpful to put out a little guide of key things to remember about bear markets, to help people navigate this new market regime.
Let's jump in!
1.) Volatility makes your positions feel bigger in P/L terms 💥
Bear markets typically bring about more volatility in asset prices than bull markets. Over the last 20 days, we've seen an average daily move in the indices of about 3%, which is much larger than the rolling 20 day average in 2021 of about 0.9%. With the same amount of capital, this pickup in average range means that in $$ terms, your P/L moves have likely gotten much bigger than "normal". In March 2020, the average daily range in the S&P 500 was over 5%!
This is important to remember, because P/L can have a huge impact on trader psychology. Lots of professional money managers and hedge funds control for this factor, reducing exposure to keep daily portfolio volatility close to their target. Some funds are mandated to do this. While you're free to do what you like in following your trading plan, this is a key expectation to hold! Expect bigger moves than normal.
2.) The average bear market lasts about 2 years 📉
The 2 year number mostly refers to how long the average *stock* bear market lasts. So far in Crypto, the average bear market has lasted about 9 months. For comparison, in stocks, the average bull market lasts more than 6 years. So, while bear markets tend to be much quicker than periods of growth in equities, they also tend to be more memorable.
Recently, bear markets have been getting shorter and shorter - the last bear market in 2020 lasted barely a few months. Some attribute this to the Fed stepping in more and more, while others often claim that the better communications infrastructure we now enjoy in the 21st century is allowing information to be priced in much faster. While the trend is certainly towards shorter and shorter bear markets, they can still oftentimes last much longer than one expects. Adjust expectations accordingly!
3.) Cash is a position 💵
While USD inflation is currently high, running at about 7-10% (depending on which numbers you're looking at), the buying power of one U.S. Dollar doesn't actually change that much, day to day. The buying power of one share of SPY changes MUCH more rapidly, per day, and, recently, it's been losing buying power a LOT quicker. The most important thing to remember for bear markets is that staying alive is *THE* most important thing. As long as you don't blow up, you can live to fight another day. Fleeing poorly performing assets for cash is an option.
This has been happening recently. If you look at the major asset classes, people seem to be fleeing to cash. Bonds, Stocks, Gold, Crypto - it's all getting sold for cash. In a "Risk off" environment, typically conservative players will rotate from risk assets like stocks into "safer" stuff like Treasury bonds. That said, with the fed hiking and inflation running high, it seems people are skipping the 3% yield they can get in a bond in favor of the total flexibility you get with cash. Another option for hedging is to sell short assets you think will underperform, or buy puts on your portfolio (if available). You can directly see the price of sleeping well in the options market.
4.) Bottom picking is hard 🎣
While it is our job as traders to find opportunities that have a positive expected value, bottom picking has been historically very challenging. In the crash of 2020, many prominent hedge funds were under-hedged going into the crash, and over-hedged coming out of it. Effectively, some of the smartest people in the world did a poor job of picking where the likely bottom was.
Unless you have a very long term strategy that allows for consistent deployment of capital over time (DCA), trying to pick bottoms in downtrending markets can be a very low bat rate% strategy.
Well. That's it. 4 things to remember for newbies to bear markets. As we mentioned, the most important thing to do in a more difficult market is to stay alive! 🐻
People keep acting like this week was crazy, in reality SPY only dipped .17% total all week!!! Lmao. Weakest bear market of all time.
DaytimeTinkerer
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@Vibranium_Capital, its just the beginning. if your so confident, go all in long. You are such a genius to rate a bear market before it is even over. SMH.
Tradersweekly
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@DaytimeTinkerer, Look at her latest posts; longing tech titles in the bear market and calling for a parabolic rally in BTC just before it fell over 20%. Wow, I am speechless.
Vibranium_Capital
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@Tradersweekly, actually I have not taken more than 5 positions total in the past 2 months. Before that I hit 2000%+ returns in a month. You should be speechless because i outperform hedge funds
Tradersweekly
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@Vibranium_Capital, If your performance is as horrible as your forecasts, then I doubt that. Anyways, like if bragging is going to prove that... your ideas speak for themselves. Recently, I even offered you the opportunity to prove how much superior a trader you are and win 20k USD by comparing AUM (I even said I would let you win if you could put up half of my sum), but you declined; you lost the right to argue further. Because you make excuses and deviate from the topic; when it gets to actual proving, you chicken out and become evasive. That is my last statement towards you in the section; I am not interested in running spamming wall with you.
Vibranium_Capital
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@Tradersweekly, you are a big waste of time, just like my only other hater. But feel free to keep hating because you run the reputation points up, almost to 10k+ love you <3
NoOneWhoIsSomeone
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@Vibranium_Capital, Sometimes it's better to just not respond and let go. Making public statements like this degrades credibility. Your positions we can't see but we can see your charts. Just focus on yourself and keep growing/adapting!
Vibranium_Capital
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@NoOneWhoIsSomeone, eh I have thousands of followers and a few haters, I don’t mind responding to both
Vibranium_Capital
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@DaytimeTinkerer, sure. I will take some longs soon. If spy reclaims support of course
gopher72
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@Vibranium_Capital, thanks to all of you. Next time please take it outside.