Plans for an eventual bear market?

Saturday, Sep 16 2017 by

We are currently in a bull market. It has been a bull market for quite some time. Looking back, bull markets tend to eventually end. When this happens, by what trigger, and what course it will take, are all unclear (at least to me).

My question to you, fellow presumed investors, is how do you intend to prepare for an eventual bear market?

Do you intend to:
A) Continuously invest now and throughout any bear market.
B) Short the market when you think it will turn down/after it has started to turn down.
C) Increase the proportion of your savings that you hold cash (like Warren Buffett, although he has size constraints that individual investors do not), or alternatively in bonds?
D) Move investments into less cyclically affected shares or markets.
E) Do nothing as "this time it's different (TM)", and bear markets will never happen.

Or something else?

Please share what you intend to do, and whether you intend to do so before a bear market or if you think you will act after it begins? Also feel free to share what approach you took during the last bear market, and how that worked out.

Disclaimer: I am not saying I want a bear market to happen, I do not wish to upset anyone and I am not trying to influence anyone's financial decisions. I just want to have a nice pleasant discussion on the matter and for people to share their strategies.

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63 Posts on this Thread show/hide all

aflash 21st Sep '17 44 of 63

In reply to post #220943

for reasons not entirely clear to me it seems to act inversely to the S&P

That part seems fairly simple:- when people feel confident they are prepared to pay up. It also acts inversely to the Nasdaq, Transports, Small Cap and other indices.

Care, however, is needed with the contango (or backwardation). Every three or six months UVXY is consolidated, your 100 units become 10 or similar. It appears to have no expiry date but the underlying futures contracts do. (Do not challenge me on these explanations, they are approximate).

I have been running a core position on UVXY for more than a year for several reasons. One of them is that when it flies you have no time to 'pick some up'. Volatile days see huge price changes measured in minutes. I have staggered limit orders. It worked well last year but volatility has been so low this year the core position is significantly down.

As you say it is time to add and if there is any volatility before the next consolidation there will be a profit on the new portion.

The last consolidation was July 20 and appears to have been 1 for 3. Spare me further detailed research, please.

The consolidated rump, however, will continue to show a loss unless the sky falls on us.

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Allan Collins 21st Sep '17 45 of 63

The S & P and Dow are at record highs and the Vix is right down at the bottom. American friends tell me however that they are now having to pay higher premiums on a whole range of options looking out three to six months.

So, it looks as if the Vix contrarians are starting to stir - a sign that volatility may be back during the final quarter of the year.

This might also narrow the correlation gap between FTSE 100 and the US indices - the gap has been getting wider and wider and I guess the pair traders have been doing rather well!

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Chipspa 21st Sep '17 46 of 63

Without wishing to be provocative I just read this very interesting article - effectively saying how many times since 2009 that the market top / start of a bear market has been called, and listing the reasons which seemed to make sense at the time.

I'm not saying we aren't at or near a top, but it might be interesting reading this first before changing asset allocation levels

"Sitting through big market advances and allowing your investments to compound is hard enough, but it’s infinitely harder to do when you’re being compelled to take action based on falsehoods."


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Howard Marx 21st Sep '17 47 of 63

In reply to post #221258

"Sitting through big market advances and allowing your investments to compound is hard enough, but it’s infinitely harder to do when you’re being compelled to take action based on falsehoods."

Ah, the clarity of hindsight.

It's easy ex-post when you know the outcome of an event to highlight the errors of those who made inaccurate ex-ante forecasts!

I'd be more interested to know the authors views at the time or what his current views are? For example, iron-ore futures have fallen 22% in the past month. Does the author think that this severe move heralds a global slowdown in industrial output? No doubt he'll tell us in a years time when he knows the outcome!

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aflash 21st Sep '17 48 of 63

In reply to post #221258

It is a well documented article.

The % falls and dates of all the corrections are well flagged.

You have quoted one of the weaker paragraphs but the inspiration for it is Jessie Livermore's "... the big money was never made in the buying or the selling. The big money was made in the waiting" quote.

He, however, was short before the 1929 stock market crash and took huge profits home from that event. Anyone holding had to wait a very long time before recovering anything. Livermore also said:"Money lost by speculation is small compared with the gigantic sums lost by so-called investors who have let their investments ride. … investors are the big gamblers. They make a bet, stay with it, and if it goes wrong, they can lose it all."

Another point that has already been alluded to in Allan Collins' 'wall of worry' post is that markets only crash downwards. One can make a lot of money quickly on those days, so it is well worth trying to anticipate them.

Stockopedians inevitably have savings invested in the market so studying ways to 'insure' them can only help.

Thank-you for the link, 

I have signed up for the newsletter because of the quality of the quotes and statistics. The hyperlien aims at long-only investors but let Jessie Livermore reply:“It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.''

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Allan Collins 21st Sep '17 49 of 63

In reply to post #221258

Thank you for drawing attention to this paper.

It implies that investment has been easy at some point in the past.

Yes, it seems easy when you are in a strong bull phase and "a rising tide lifts all boats" but that just lulls you into a false sense of security. I have never found it easy; and there certainly isn't the Holy Grail out there.

Despite the low volatility and data suggesting that returns have been at record low levels however, I do believe markets always offer loads of opportunities. I went to a seminar many, many years ago hosted by the financial trader John Piper. He coined the phrase "markets move to excess across all time frames". What he meant is that it doesn't matter whether you are a day trader or a long-term investor with a 5/10 year outlook - the market will always produce oversold and overbought situations. You just have to find them!

I think if you combine patience with your own investment tenets and disciplines things become simpler.
Was it Warren Buffet or Charlie Munger who said "investment is simple - but not easy"?

Allan Collins

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kalkanite 22nd Sep '17 50 of 63

Howard Marks of Oak Tree Capital has written a great piece about this subject here...

His reasoning is that we are currently in a stage of the bull market whereby near term future gains from investing are low. He boils down current options as follows:-

1. Invest as you always have and expect your historic returns.

2. Invest as you always have and settle for today’s low returns.

3. Reduce risk to prepare for a correction and accept still-lower returns.

4. Go to cash at a near-zero return and wait for a better environment.

5. Increase risk in pursuit of higher returns.

6. Put more into special niches and special investment managers.

Points 1 & 5 is simply foolish. As individual investors we all have different circumstances, for example if your investment totals £5000 you can get out of the market quickly so therefore you can be more agile. If your investments total say £3m then you don't have a chance in hell of getting out unscathed if a crash happens. Also you need to ask yourself; would a 50% hit on my investment really hurt me?, and, if I didn't make any money for the next 2 years would that be a problem?

For me personally the answer is yes and no to the above so I will be investing according to somewhere between points 2 & 4 above. I am currently 90% cash and realise that I need to work much harder to find investments that are right for me. I will be looking to invest somewhere between 0 and 25% of my investments until the environment becomes better, and I will be looking at making say 2 or 3% of total portfolio per year until then (hopefully).

The problem with my strategy is that the stock market could move up another 50% and should there be a correction/bear market of say 20% do I then start reinvesting at full tilt having missed such a big rise?

Investing is simple but it certainly isn't easy.

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InvestedGeordie 22nd Sep '17 51 of 63

It's something I constantly think about. I'm very interested in Geopolitics and larger Macro type events and how they would have an effect on my portfolio. I have learnt however, a few things:

I) My interest in Geopolitics has had a negative effect on my returns by over trading and generally being a 'flitter' messing about trying to get in and out of positions
ii) If there is a crash, there's a significant chance that I'll not be able to unwind most of my positions immediately for anything other than a significant loss.
iii) As I'm in my early 30's I could take a big hit, and have 30yrs to recover.

Liquidity will likely evaporate immediately should something mad happen. i.e. Tactical Nuke on North Korea's artillery positions followed by missile strikes to launch sites. Nothing can be done about this, other than increasing cash and having shorts on FTSE100 for example.

The other side of this is the question of global debt levels, repatriation of Gold and all sorts of mad stuff caused by central bankers across the western world. Yellen has signalled an unwinding will begin in the not too distant future. This is more of a concern for me as it is this which is more likely, imo, to take us into a long term bear market.

The IG portfolio currently is 24% cash. I won't go below 20% cash as things stand.

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Allan Collins 11th Oct '17 52 of 63

Good Afternoon Logic,

Going back to your original post on the 16th September. You might like to have a look at Meb Faber's recent paper over at Cambriain:

He has looked at different asset mixes during the big bear markets and now offers a further solution which, according to his backtesting, would have worked out rather well - a majority of funds in US Treasuries together with equity put options.

The only issue I have with buying put options going into a bear market, and on the way through a bear market, is the market makers see you coming and premiums get jacked up.

I recall trader John Piper saying he thinks traded options are great, but he would never buy them - only write them: that's where the money is.

Just another idea for your arsenal when this bull market finally rolls over.

Allan Collins.

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matylda 11th Oct '17 This post is under review

In reply to post #221368

"The financial trader John Piper" - Who made more from you that day than he made from the markets the entire week, probably month, more likely year!

Warren and Charlie - Respect - But should not be used in the same comment as John Piper - Complete disrespect.

Blog: Briefed Up
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Allan Collins 11th Oct '17 54 of 63

In reply to post #227613

It must be well over 20 years ago since I attended a John Piper seminar and I have no idea what I paid - and I have no idea what his trading record is since then. You seem to be implying that he has not done too well!

I do know however, that I brought away one or two comments that have proved to be valuable over the years.

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FREng 22nd Nov '17 55 of 63

In reply to post #220943

£UVXY is quoted at $13.39 as a type this. It has been flat for quite a while, so maybe it's a safeish place to park some cash while waiting for the arrival of Paddington. It doesn't seem to have gone much lower than $6. I might set an alert for $8 ...

EDIT. Or Boost Sp500 Vix Sh-Ter Fut 2.25x Lev Day (LON:VIXL) looks better. Currently $0.2 and it was over $5 a year ago - and it's London listed.

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Taff6 15th Feb '18 56 of 63

Hi all I've just come across this discussion, and since everyone's talking about a crash thought I'd post this chart to refresh things. I'm not an Elliot wave enthusiast but know some of you are (Aflash). we've just completed 5 waves up since Brexit and are know in a correction the 5 wave sequence is marked with small blue arrows. currently we could could be at the fib .618 of a Gartley pattern which would take us back on to resistance that has stood since 2000, resistance becomes support and all that.  Since the year 2000 (nearly 20 years ago) the FTSE is up by a huge 280 odd points. I've also put some green arrows where previous highs have been taken out and can't find a single occasion where the resistance didn't act as support, its always been retested usually after a big move up! Do we think 280 points is a lot after 20 years? I've only posted this chart so everyone can discuss away, I don,t have a strong view either way but history is the only guide we have to the future and there could be some big gains ahead if the past is anything to go by! Any views?


Here's a stocko link to the sequence since Brexit

Regards J    

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Taff6 15th Feb '18 57 of 63

It looks a lot like 1992! and the same trend line may come back into play, that's the same trend line that reversed the 1987 and 2000 bears. Any thoughts out there?

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pka 15th Feb '18 58 of 63

Is there any evidence that someone using historical Elliot Wave graphs is able to make reliable predictions of the future?

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Taff6 16th Feb '18 59 of 63

Absolutely not, and I'm not an Elliot fan, nevertheless thousands are and that's what they'll see! I'm not even saying I'm bullish. The markets will decide where they want to go and all we can do is follow, However if the markets start going up I don't want to be twiddling my thumbs thinking why, same if that trend line breaks. The more views we can get on market direction the better informed we'll all be! Some Elliot guru's will tell you differently though, usually they're wrong because no one else can see what they're looking at!

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aflash 19th Feb '18 60 of 63

That T1 line seems to be about 6600. Difficult to comment without the software.

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Taff6 19th Feb '18 61 of 63

Aflash 5850, is the level, there have been several occasions where price has dipped below and reversed from above last time it acted as support was Feb 2016 5499

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AnonymousUser252054 19th Feb '18 62 of 63

In reply to post #221258

I'd never heard of Charlie Bilello, so thanks for the link to his blog. Fabulous writing.

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Taff6 20th Feb '18 63 of 63

I'd never heard of Charlie Bilello either. Thanks Shine66 and originator for link to his blog. I'm just posting a copy of his Tweet. "Break on Through to the Other Side"? and chart of US 10 year Treasury Yield. Trend line is very interesting in more ways than one!


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