Get ready for the bear

From Jeff Clark, Editor, Jeff Clark’s Market Minute:

The stock market is changing character.

It’s more volatile – swinging from oversold to overbought and back again. Investor sentiment flip-flops between bullish and bearish almost every week. And traditional seasonal patterns – which played out with remarkable regularity over the past 10 years – are no longer reliable.

For example, Thanksgiving week, which is normally bullish, turned out to be bearish this year. But, by the end of the week, conditions were so oversold and investor sentiment (a contrary indicator) was so overwhelmingly bearish that a bounce looked like a good possibility.

And we got one heck of a bounce.

The S&P 500 closed at 2632 on the Friday after Thanksgiving. It closed at 2790 this past Monday. That’s a 168-point rally – a gain of 6% in just six trading days.

That was enough to flip most technical conditions from oversold to overbought. And it was enough to shift investor sentiment from miserably bearish to quite bullish.

The financial television talking heads were giddy at the end of the day on Monday. Heck, many of them were calling for a rally to new all-time highs by the end of the year.

That changed on Tuesday, when the S&P lost 3.24% in one day. Stocks continued lower yesterday, with the S&P hitting a low of 2623 during the session.

This action feels quite similar to the action in late 2007. In other words, I think we’re transitioning from a bull market to a bear market.

That means there’s going to be more volatility. There’s going to be wider swings between highs and lows. The market’s proverbial rubber band is going to stretch more often… and in both directions.

As a trader, I’m looking forward to the transition. It means more extreme conditions. It means bigger and faster moves. It means more chances to make quick trades.

But the strategy for trading a bear market is different than trading a bull market. You can’t look for trades that last several weeks. Most trade setups in a bear market will play out within days. So, you have to be more active.

You can’t hold positions and try to capture the largest possible profit. Trailing stops won’t work. If you try using them, you’ll watch profits one day turn into losses the next – because the market will gap in the opposite direction. So, you have to be quick to take profits – without worrying about leaving money on the table.

Just think about everyone who was shorting stocks into oversold conditions during Thanksgiving week. They got crushed when the market reversed course and put on a blistering rally last week.

And for traders who bought stocks into overbought conditions last Monday, well… they’ve been crushed by the action the past two trading days.

My point is that, as traders, we’re going to have to shorten our time frames. We’re going to have to get into and out of trades faster. We’re going to have to be more active.

I think that’s a good thing.

For now, though, let’s take a look at the long-term picture of the market so that you can understand why I’m thinking this way. Here’s the monthly chart of the S&P 500…

Look at the MACD indicator at the bottom of the chart. The red circles show each time over the past 20 years this indicator has turned lower from overbought conditions.

In 2000 and 2007, those downturns warned investors that the market was topping. The bull market was ending. And a new bear market was on the way.

In 2015, the MACD indicator turned lower. But, the stock market didn’t break down. So, we might view that as a false signal.

Keep in mind, though, the market spent most of 2015 just chopping back and forth. So, you wouldn’t have missed out on much if you turned cautious in early 2015.

Last week, as we finished out November, the MACD indicator on this chart turned lower from overbought conditions. Given its history, this indicator has turned me cautious.

The monthly chart of the S&P is still holding above its 20-month exponential moving average. So, we’re still in a bull market for now.

But, this chart looks quite vulnerable to me. With the MACD turning lower, I suspect we’re probably just a month or two away from the broad market breaking down and reversing the primary trend from bullish to bearish.

That may not matter much in the short term. The S&P is oversold enough to put on a decent bounce, and it won’t surprise me if the rally lasts a few days. But the longer-term picture is turning bearish. So, the trading strategy that worked for most of the past decade is probably not going to work in 2019.

Like I said before, I think that’s a good thing – especially for traders who are prepared for it.

Best regards and good trading,


Crux note: During the Mastermind Kickoff event last night, Jeff discussed his proprietary trading strategy for a bear market. He even demonstrated it, making a live trade that earned 36% in four days. It was a huge hit, and hundreds of readers tuned in.

Jeff will share more of his techniques during his upcoming Mastermind, and this free kickoff event gives a glimpse into how Jeff enters and exits trades… looks for trade setups… And he even shared a market setup you can use today to apply his strategy.

Jeff’s agreed to share a replay of the event, but not for long. We’re taking it down at midnight on Saturday… So you’ll want to click here before it’s too late. It may end up being the best investment decision you ever make…

× Subscribe to Crux
Want more posts like these?
Like us on Facebook?
Crux Contributors