Here’s 3 Ways To Make Money In A Bear Market

DaddyBall!

After a not-so-brief sabbatical, the Weekly Battle
Plan piece is back. The past few months have brought the writing of a new book
(details later) and the start and finish of my kids’ Little League baseball and
fast pitch softball season. My son’s team won 9 consecutive games mid-year and
finished in second place. Not bad, considering they started the season more
interested in watching hang-gliders fly over the fields than they were in
getting kids out at third base (see

my March 19 column
). My daughter’s team did even better, making it to the
championship game. And had the season ended there, I’d have been a happy man.
But then came All-Stars, which makes me an even happier man. Why? Because I get
a chance to be entertained! During the various tournaments my daughter played
in, I was entertained watching managers getting tossed out of games, I was
entertained watching two different managers erupt and then “demand” their kids
leave the field (one was my daughter’s manager), I was entertained watching a
manager giving an umpire the finger in the middle of the game (he did this from
the parking lot…he too has been tossed out of his game), and of course, what
would any All-Star season be without the annual two mothers from opposing teams
calling each other “b**ch and getting into a near catfight in front of hundreds
of other people (NICE!).

Until this summer, I used to think that the primary purpose the kids spent half
their summer practicing 2-3 hours a day, five days a week was to win the
tournaments they played in each weekend. That makes sense, doesn’t it? But no, I
had it wrong. All wrong. I learned this year that the main reason for the kids
putting in all this time was so they and their parents could be entertained
watching the head coach’s daughter play. That’s right, 11 other kids got the
chance to be “under-studies” to the head coach’s daughter. When our manager’s
daughter wasn’t the starting pitching (the team had an excellent starting
pitcher, but that didn’t matter in deciding who started most games), she was
starting in the infield (same situation again). And of course, she batted either
third or fourth in the order most games, ignoring the fact that few parents
could remember her ever getting on base. And of course, after each team victory
whose name was mentioned the most as key to that team’s victory? One father
early on dubbed it “DaddyBall” and that’s the name the rest of the season took.
Fortunately, the girls won their share of games and even made it to the
championship round of two tournaments (and guess who was the starter in the last
championship game? Can you say “down 7-0 in the second inning?”). But, like all
good things, the season has come to an end. But fortunately the opportunity for
us to be entertained has continued. A few days ago all the parents got an email
from the head coach’s wife. Guess what? The show still goes on! Here was the
invitation we received…

“Are any of the team members interested in attending
(her daughter’s name here) GREASE play Friday night, July 16th?  She plays
Sandy, and her two sisters are in the play, as well.  Let me know who would like
to come and I will get tickets.”

Wow! I was excited! But then I remembered. I had scheduled to rearrange my sock
drawer that night and it’s a commitment I just can’t break. Bummer. No GREASE
play for me this season. But, because our kids are the same age, and the head
coach will likely be the All-Star coach in future years, they’ll be plenty more
opportunities like this. Man, I’m a lucky guy!

Opportunities In A
Declining Market

A few weeks ago, as the S&P 500 was hovering around the 1140 level, there seemed
to be a heck of a lot of prognosticators who were very bullish. We saw these
bulls on TV, we read their columns on various financial sites and according to
them, it was only a matter of time before the market was going to soar even
higher. Now, with the S&P’s a scant 4% lower two weeks later, these same bulls
have found all the reasons in the world to be bearish. “The techs have broken”
“the 200 day MA on the S&P’s is about to give,” “the NASDAQ has broken support,”
“no rally can repair the damage that has been done” and so on, and so on and so
on.

Well who knows? Maybe the same style of “guessing” these people used to
incorrectly predict prices two weeks ago will this time prove to be correct
(kind of like flipping a coin). So let’s today go with their assumptions. Let’s
today assume that the bear has arrived and we’re going into a sustained
declining market (I’m not saying that…they are). So what does one do?
No longer trade? Go into all cash and wait for the market to stage a massive
rally and re-enter to the long side (after the fact again)?

The answer fortunately, is ‘no.’ In fact, should we be going into a bear market,
the opportunities for short-term gains will likely be greater than the
opportunities that exist during a bear market.  And this week, I’ll show you
where those edges and opportunities have historically existed.

Finding The Best Opportunities In A Declining Market

There are many ways to trade a Bear Market. The three I’m going to show you
don’t have the same purported edge that the prognosticator guessers have, but
they have had a statistical historical edge on the short side. Even
though there is no guarantee these edges will hold in the future, these edges
have held for years…

1. First, we need to define exactly what a bear market looks like. We’ve looked
at this many different ways, but the one way that has the biggest edge is the
200-day simple moving average. We looked at nearly 1000 situations matching up
likewise indicators above and below the 200-day MA. And, there’s overwhelming
evidence that markets behave differently below their 200-day moving average
versus above their 200-day MA. One of the biggest differences is that markets
under their 200-day MA tend to exhibit more volatility, which means more daily
range. And more daily range usually means more opportunity.

2. When the market (and be careful here, because in our opinion there are two
markets, the S&P 500 and the Nasdaq market) is below the 200-day MA, we’re going
to be looking for ideal times to be entering on the short side. As I am writing
this (Thursday July 15) the S&P 500 is above its 200-day MA and the Nasdaq is
below its 200-day. Therefore, we’ll focus on the Nasdaq market.

3. Edge One:  The average weekly gain for the Nasdaq has been .37%
over the 15 year period of time we studied. Yet, when the Nasdaq market has
closed higher three days in a row
while under its 200-day MA, the average
loss has been 1.50%.

4. Edge Two: When the Nasdaq has made four consecutive higher highs (this
means today’s intraday was higher than yesterday’s intraday high, and
yesterday’s intraday high was higher than the previous intraday high, etc.),
this has on average been a bear trap. In spite of four straight days of
strength, this strength (again on average) has disappeared and has led to
average declines of 1.14% over the next week (the loss has been 1.85% for 5 days
in a row). As mentioned above, this is versus the average weekly Nasdaq gain of
.37%.

5. Edge Three: When the advancing issues for the Nasdaq have been greater
than the declining issues for three consecutive days, (meaning more issues were
rising than declining), the Nasdaq has lost on average 1.45% over the next week.
Yes, maybe the buyers were coming in. But, on average, these buyers were down a
week later. Those who shorted the Nasdaq (i.e. the QQQ’s) profited during these
times.

Going Further

Let’s discuss a few things regarding these results:

1. There’s no guarantee they will continue in the future.

2. None use stops and stops are always advocated.

3. These are big edges. If you can find opportunities every week that average
over 1% a week, your returns have the potential to be substantial over a one
year period of time.’

4. You can probably take these scenarios and increase their edge. I’ve just
isolated these edges for you. Combining them with other things have the
potential to bring even better returns.

Wrapping It Up and Where You Can Find More Information

As I mentioned earlier, we’ve just published a book entitled

How Markets Really Work.

The book looks at many of the most popular ways to look at markets and shows
exactly where the edges have been. Price, Volume, Market Internals and Market
Sentiment are all covered. The three edges mentioned above are just three of the
more than 800 scenarios we looked at. If you would like more information on the
book, go to www.TradersGalleria.com.
You’ll also be able to read an excerpt from chapter one. The book will be
released in about three weeks and it will give you a more precise way to trade
the markets as you move forward.

Have a great week trading (and if you have any questions on the above, please
feel free to email me at
lconnors@tradingmarkets.com
)!

Larry Connors