Join        Login             Stock Quote

Of Bear Markets and Defensive Strategies

 November 14, 2012 11:46 AM

A couple of questions came in on yesterday's blog post that I wanted to try to answer.

One reader asked the percentage that Monday's trade raised in cash. Another reader answered for me that just about all such trades tend to be a couple of percent or so which was the case with this one. One thing to remember is that bear markets start slowly over several months giving plenty of time to get out. We choose a breach of the 200 DMA as a starting point because it is simple to track and easy to explain to clients, oh and we have a reasonable basis to believe it is effective for our objective of trying to avoid the full brunt of large declines.

One reader asked about getting whipsawed by the 200 DMA. The answer here depends on your definition of whipsaw. For example if we sold one position with a low single digit weighting, as we did on Monday, and the market were to start a six week 20% rally to close out the year then the drag from the sale would be negligible. Obviously a more aggressive selling of stock as some do would meet more people's definition of whipsaw. I don't think whipsaw pertains in the case of a small trade but you may view it differently.

[Related -The Boeing Company (BA) Q2 Earnings Preview: Durable Earnings Beater]

Another question was on how we decide what to lighten up on and if there is anything we would buy. It is different every time. Often we are looking to remove volatility but this time removed a holding that had not been doing very well. In an instance where removing volatility is a focus then you would expect that we would reduce exposure to a sector that is typically more volatile than most of the others. For investors who just use broad asset class funds then it would make sense to consider taking defense from their small cap exposure--for investors who believe in defensive action based on whatever criteria they deem suitable.

[Related -Angie's List Inc. (ANGI) Q2 Earnings Preview: Trending Towards a Smaller Loss than Expected]

We would consider buying market neutral funds and inverse funds and did so during the last bear market.

I want to repeat something from above;

bear markets start slowly over several months giving plenty of time to get out

The best thing would be for you to look at charts from past bear markets and see for yourself how this has worked before. This is a normal market behavior which has repeated many times and so I believe in the idea going forward.

iOnTheMarket Premium


Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageLadenburg Thalmann Financial Services (NYSEMKT:LTS): Heavy, Durable Insider Buying

Ahh, but any worries over price levels didn’t stop multiple insiders at Ladenburg Thalmann Financial read on...

article imageInternational Business Machines Corp. (IBM) Q2 Earnings Preview: Small Beat and Pop

International Business Machines Corp. (NYSE:IBM) will host a conference call Wednesday, Jul. 16, 2014 at read on...

article imageGoogle Inc. (GOOGL) Q2 Earnings Preview: A Few Pennies Either Way Make a Big Difference.

Google Inc. (NASDAQ:GOOGL) will hold its quarterly conference call to discuss second quarter 2014 financial read on...

article image19 Companies That Could Beat Earnings and Pop on Price Next Week

Using iStock’s proprietary iEstimates model, we have identified 19 publicly traded companies that could read on...

Popular Articles

Daily Sector Scan
Partner Center

Related Articles:

How To Profit From The Death Of The Big Banks
More Articles on: Finance

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.