As discussed in my last post, I’m taking a look at a better strategy for bear markets than traditional buy-and-hold investing. Specifically, I’ll use the MultiStage Trading System to show the potential performance during down-trending markets. This is the approach I use to trade in my Covestor managed model. The first question we have to answer is, “What’s a bear market?” Here are a few popular definitions:
The wordnet dictionary at Princeton says:
“A market characterized by falling prices for securities.”
Wiktionary says:
“A stock market where a majority of investors are selling ("bears"), causing overall stock prices to drop.”
Goodmoney.com dictionary says:
“A period of time during which security prices follow a downward trend.”
Okay folks, could you be any LESS specific? I think it’s common knowledge among anyone reading this page that a bear market means prices are declining, but I need some sort of measurement to tell me exactly when it begins and ends. There are many, so I picked a fairly simple one: a long term moving average. This is a measure that I believe is widely known and fairly well accepted.
Below is a chart of the of the SPY (SP500 ETF), along with it’s 20 Month MA. This helps us clearly visualize where the bear markets begin and end. I’ll use the simple monthly close to be my indicator. Specifically, if the monthly close is below the MA line we are entering a bear market, and if it closes above we are entering a bull market.
Based on our simple definition, in the last 16 years there have been three bull markets and two bear markets. As the chart shows, the starting point for each is:
- Bull: 2/1/1995
- Bear: 12/1/2000
- Bull: 8/1/2003
- Bear: 2/1/2008
- Bull: 12/1/2009
Now that we have specific timeframes for each big market we can backtest the trading system and see how it performs during the bear markets, hopefully gathering some clues along the way which point us to a better strategy. That’s the topic of the next post.
Good Trading…
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