Tim Truebenbach On How To Make Money In A Bear Market
Brice Wightman: Good
afternoon and welcome to TraderTalk. Today we are
pleased to have with us a gentleman who uses fundamentals, technicals and
pattern models to achieve excellent results in his hedge fund, True Capital
Partners, LLC. We also have a long-time TMer to
interview our special guest. It’s my pleasure to introduce Eddie Kwong, and our
special guest, Tim Truebenbach.
Eddie Kwong: Hi, Tim, how are you doing?
Tim Truebenbach: Fine, thank you. It’s
great to be here again.
Eddie:
So, what do you do think about the
current markets? I know you were beginning to be a little bullish last week.
Tim: In the beginning of August I became
bullish as the market offered solid evidence to the point, but after Monday’s
distribution, where the market fell on heavier volume than Friday, I believe
that we are headed lower over the intermediate-term until the market indicates
otherwise.
Eddie: Still, we haven’t broken lows. Is there
anything that could happen that would prop us up, or do you think the
probability is that we’re headed lower no matter what? I
know you’re not into predictions…
Tim: I’m only speaking based on what I
have already seen from the market. We could definitely find support at the July
lows and continue with the rally. We would also see any support marked by
accumulation by institutions…which would be the opposite of what we have
already seen over the past several weeks. Any new evidence of accumulation would
change my thinking. It would also help to see growth stocks push higher
alongside that.
Eddie:
Thanks. Okay, let me ask you some basic
questions. Last week one of the things that came out of a conversation you and I
had was that you actually have been identifying some good trades and that there
have been opportunities during this bear market. Let’s start from square one and
then we’ll get to what the opportunities are. My first question is: How do you
identify when a bear market is beginning?
Tim: I look for and count distribution
days in the general market indices…or days where an index closes lower on
heavier volume than the previous day.
Eddie:
Doesn’t that just tell you that the
market is in danger of dropping? But how do you make the distinction between
just a drop or correction and a full-fledged bear market?
Tim: They both begin the same way…one
major difference in the two takes me to the next step: to look toward leading
stocks and sectors and see how they are acting. Right now they have been unable
to advance, thus signaling trouble, whereas in a correction, they hold firm and
support kicks in indicating that institutions are still buying leaders.
Eddie:
Using this approach, are you able to
gauge the strength of a downturn? For example, the distribution you saw Monday,
was it indicative a major plunge, or just a pullback?
Tim: This is very hard to tell until it
gets going. I would say that leading stocks’ behavior is more representative of
this. But it is still very hard, if not impossible, to consistently predict a
decline’s severity.
Eddie:
I see. Now here’s what everybody wants to
know. How can you tell if a bounce during a bear market is nothing more than
bear market rally vs. something BIGGER, like a new bull market? Is there a way
for me to look really good next time I’m on CNBC?
Tim: The market is very good at setting
up to fool the most investors it can. There are certain indications I look at
when a new rally begins, but nothing can be set in stone. For example, the more
factors that are present lead to a better bounce, such as growth stocks setting
up to break out and provide leadership, high volatility, mass bearishness, etc.,
but again, all of this was present after 9/11 and that rally turned out to only
equate to a bounce. It’s better to let the market be the guide rather than
predict what will happen.
Eddie:
I see. And I agree that it’s not a good
idea to try to predict stuff. Now explain how to apply all this to trading. How
would you treat a bear market bounce? Are you trading it? Are still on the
sidelines? Are you using it as a setup to put on shorts?
Tim: I look at all rallies the same and
treat them as such. Once ample evidence has come in that a new rally of some
sort has begun, I will look to take positions in stocks that show strong
fundamentals and technicals. The only difference is I will look to lock in some
solid profits right in the beginning, and then worry about getting in on a
bigger move if it is there to occur. This allows me to take advantage of bear
market bounces and position myself correctly for the beginning of a new bull market.
Eddie:
I think that might come as a surprise to
some people who think you’ve been on the sidelines for the past two years. Given
that there have been some nice rallies in the recent past, you’ve had the
opportunity to put on some longs I take it…any memorable ones come to mind?
Tim: Taking advantage of a bounce, or
looking to short the market when things turn ugly, are simply ways I can enhance
the portfolio’s returns from just a simple money market. Throughout the past two
years, despite taking small positions, I have never been over 15% invested, and
with 85% of my capital in cash, I am considered on the sidelines, but still able
to reap some rewards when the odds are in my favor. Of course, more aggressive
investors may choose to utilize larger positions.
Eddie:
I know that some people may be curious as
to your attitude about shorting. Isn’t that where most of the money is made
during a bear market?
Tim: I have also heard that shorting is
where the money is made, and I have yet to see people cleaning up on the short
side vs. those getting killed in short squeezes, etc., trying it. I do believe
shorting can work, but it is a whole different animal than buying stocks and to
produce solid profits requires a very conservative approach for most investors.
Eddie:
Still, even as it may be a strategy that
you do not emphasize as you are managing a hedge fund, how do you identify a
setup that you believe makes a good shorting candidate? I know that you have
picked these successfully in your service and are planning to add a feature to
it along these lines.
Tim: I like to keep shorting very simple
because from my experience, a lot can go wrong very quickly. I look more toward
the general market and lagging sectors to short rather than individual stocks
because it is much easier to see institutions looking to get out of the general
market, as well as the moves are much slower. It is much harder to “run in
the shorts” for the S&P 500 than some stock that only trades 500,000
shares a day.
Eddie:
I’m glad you brought the subject of
trading sectors up. How do you incorporate ETFs into your trading? What are the
advantages?
Tim: ETFs allow me to take shorting (and
buying) one step further than a general index. I am able to hone in on a lagging
sector as a bear market begins and put out shorts on it. This will perform much
better than an overall index and they are still relatively easy to identify as
to their strength. Simply scanning the sectors last week, it was evident that
semis were very weak and if we received my final tally of distribution, we could
short the SMHs. They are one of the worst performing groups and a good short.
Questions
From TraderTalk Workshop Attendees
Eddie:
I’m going to throw you a couple questions
that people in the audience have. What type of indicators and charting (candles,
line charts, etc.) do you use in your trading?
Tim: I use bar charts and many of the
sentiment indicators such as VIX, Put/Call, etc. Although the most important is
price and volume. You may want to check out the course or take a free trial to
the service as it frequently mentions the indicators I am watching.
Eddie:
Knowing that we are in a bear market or
bear market rally, what compels you to purchase a stock during this tough market
environment? We often see these stocks fall with the weight of the market during
this time, so why even attempt to buy?
Tim: There are often short-term profits
to be had, and I don’t let my opinion get in the way of my trading. For example,
all bull markets begin the same way, a rally and a confirmation about a week
later. Yet this doesn’t always lead us into a bull market. I also adjust my
rules accordingly, one cannot run before they learn to walk, so I will take
small profits before I look to make a large profit, and even bear market rallies
allow me to do this.
Eddie: Do you interpret
accumulation/distribution days the same during this
period of low volume? And are there any other volume clues
to look for when volume has been way below average?
Tim: Yes, same basic
definitions for accumulation and distribution regardless of what volume is
relative to the average.
Eddie:
You mention being long occasionally in the last couple years, which is a
surprise for us who have been 100% sidelined. You say you’ll take a trade and
then look to take quick profits on part of it. This sounds a lot like a swing
trade. Are you reducing your time frame due to the environment?
Tim: I have
only amended my rules so that I can take advantage of these short tradable
rallies without sacrificing a shot at larger gains when a new bull market does
unfold.
Eddie:
Taking shorts is very non-O’Neil as well, and surprising. Is your time frame
reduced here as well?
Tim: O’Neil
has always preached that shorting is extremely tricky, but he has in fact made
money from time to time in it. Korvette in the ’60s was such an example, and he
even wrote a pamphlet on it in the late ’70s. The main point I make, and I
think he basically says the same thing, is that shorting is very tricky as well
as not nearly as productive as going long in a bull market while being sure your
capital is intact.
Eddie:
I like how you use ETFs to be conservative. Is there a minimum volume amount
that you demand? Some of them can have puny liquidity.
Tim: I would
stay away from illiquid items, especially in shorting since they are very easy
to squeeze. Q’s and SMHs both trade millions of shares and were the two best
candidates to short lately.
Eddie:
Another question: Do you expect us to
retest the July lows in September or October.
Tim: Technically speaking, yes. We are
headed lower based on the recent action and those lows will provide us with the
next level of support. Of course, new evidence from the market could force me to
change my mind.
Eddie:
So just watch it from day to day?
Tim: Absolutely, and week to week. It
would take four days including tomorrow’s trading to change my thoughts.
Eddie: Tim, looks like we’re about out of time.
As always, it has been a lot of fun.
Tim: It was a pleasure spending my time
sharing my thoughts and chatting about the market.
Eddie:
Tell you what, if the market does do a
big turnaround to the upside in the next couple of days, I’ll set you up for
another TraderTalk. Then you can update us.
Tim: Sounds Good!
Eddie:
Later!