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  1. Home
  2. / Investing
  3. / Stocks

Bear Market Has Different Rules

Every bear market in history was followed by a fabulous bull market. So be patient.
By ADAM SARHAN Feb 09, 2016 | 03:00 PM EST
Stocks quotes in this article: GOOGL, ICE, LNKD, DATA, RL

I'm operating with the notion that we are in the early stages of a new bear market (and global recession). My longstanding readers know I first turned defensive on equities in early August 2015 (before the big August crash). 

In the short term, the action remains lousy on Wall Street (to put it nicely). The major indices continue to break down and several key stocks broke down badly after reporting earnings -- Alphabet (GOOGL), Intercontinental Exchange (ICE), LinkedIn (LNKD), Tableau Software (DATA), Ralph Lauren (RL), just to name a few casualties from last week. I'm often asked, how do you navigate a bear market? (Alphabet is part of TheStreet's Action Alerts PLUS portfolio.)

First, cash is a position for those of you who don't want to deal with the nauseating moves of bear markets. Second, for those of you who want to play, keep in mind, the rules change in a bear market. Remember that markets move in cycles. There are only three things any asset (stock, bond, currency, commodity, real estate, etc.) can do: move up, down or sideways. In uptrends, conventional wisdom tells us to buy low and sell high. Or buy high and sell higher (for those of you who like to buy breakouts). You have also probably heard the adage about buy the dip and sell the rip. I can go on and on, but you all know the "rules" in a bull market. 

Put simply, the rules are reversed in a bear market. Instead of buying the dip, you sell the rip. Meaning, if you are looking for tactical trades, look to short strength, not buy weakness. Instead of buying pullbacks into logical areas of support (prior chart highs, 50-day moving average line, etc.), look to short strength into logical areas of resistance (prior chart lows, 50-day moving average line, etc.). The list goes on and on, but the important thing to keep in mind is that emotions rule in bear markets and the swings can be very erratic, both up and down.

Also, it is important to note that every bear market in history was followed by a fabulous bull market. So patience is and can be your best friend. Finally, keep in mind the largest moves (both up and down) happen in bear markets. Always keep your losses small and never argue with the tape.

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At the time of publication, Sarhan had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Stocks

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