Most investors struggle with understanding the fluctuations of the markets and how to trade within them. A typical buy-and-hold investor who has been in the markets over the past 14 months has spent a great deal of emotional energy, and savings. Since January 2015, the SPX has returned -5.48%. Though this is far better than just a few weeks ago (-11.2%), watching markets continue to drop and accounts ooze losses is just too painful for most investors.
That’s why so many investors refuse to watch their investments – or even open their brokerage statements – during difficult markets. They choose instead to believe their investment advisors by repeating the same mistakes of 2000 and 2008: “It’s only paper losses unless you sell. Markets always come back”.
That statement is true, but as investors in 2000 and 2008 held on to positions, they sat still and watched bear markets destroy years of gains in their portfolios. They lost anywhere from 20%, 30%, 40% and, 50% out of their retirement accounts. Surely, after eight years of holding on, most investors are finally ahead of the game again. But there were an awful lot of investors who didn’t have another 8 years to wait for that recovery.
The question now is who wants to go through that pain again? We don’t have to, and we won’t let you with our trading systems. We will increasingly play downside market moves as a bear market develops. We will earn profits, rather than lose them, by taking short positions or by staying in cash.
We haven’t entered a full-fledged bear market yet, but we are getting closer. Indices are well below their 220 day average and have been bearishly down there since January. If recovery rallies fail to lift markets back above this important level we may very well continue to form “lower lows” on the indices, which will confirm a bear trend is being established and markets will continue to respond with steep declines. We’re in one of those “recovery rallies” right now, but it’s too dangerous to put on a long position even for a quick trade.