You Have Two Weeks to Prepare for the Next Bear Market – Here’s How

The first quarter of 2016 was one for the books. Since the markets got out of their own way in January and found their footing, we’ve had nothing but gain after gain.

Now, January really was one of the most brutal starts in nearly 12 years, so those gains aren’t quite what they would be otherwise – the Dow is up just shy of 5%, the hard-hit Nasdaq has scraped out 1.16%, and the broad, deep S&P 500 is up around 4.06% – but as traders, we know to take profits when and where they come.

That’s the easy part.

Now we’re about to run headlong into one of the weakest traditional “seasons” on the markets. According to the Stock Trader’s Almanac, since 1950 the Dow has returned an average of 7.5% from November to April.

But the May to October window sees those gains pared to just 0.3%, on average, hence the old investors’ adage: Sell in May… and go away.

But I’m going to show you how you can hang tough in May… and walk away with all the money gun-shy investors are about to leave on the table.

Stay Flexible on Your Trades to Profit in Any Market Direction

For as much hard science, testing, and empirical research goes into successful trading, investors can be a pretty superstitious bunch. They’ll come up with all sorts of folk wisdom to try and explain the patterns that they’reexperiencing, so you hear things like “Sell in May… and go away.”

There isn’t a definitive cause to this May to October weakness, although we do know that trading volume is lower overall.

Maybe investors who would otherwise be glued to their Bloomberg terminals and mobile phones are off on vacation, or swimming, or barbecuing or even building birdhouses. There’s really no telling.

The action is so slack at this time of year that some brokers (perhaps conscious of their own compensation structure, perhaps not) may caution their clients against going to cash, citing concerns about commissions, fees, and taxes associated with liquidating positions.

But that’s beside the point. As traders, we don’t have to liquidate anything during these doldrums, and unless we have a long-term or LEAPS options position open, we don’t have to sweat that low volume.

You see, some traders may see low trading volume widen the spreads a tad, but if you stick (like I do) to high-volume, liquid options, this really isn’t much of a concern.

Another option is to scan for stocks on the Chicago Board of Options Exchange/International Securities Exchange’s “Penny Pilot” list. These are nearly 370 stocks with really tight options spreads – in many cases, just a penny.

When I find a stock I’d like to make a trade on, I can run it through my toolbox and see things like the historic success rate on trades, the average positive or negative move and how long it took to make that move. Even during this slow six-month period, there will be really compelling, lucrative trades to put on…

…as long as you know where to look…

Here is Your May Market Forecast

There’s no need to worry about where the market is headed in the warmer months, either. Up or down or both directions, it’s easy to trade puts or put credit, ‘loophole’, trades.

However, I think in this case, with on or two exceptions, we can expect the markets to be bearish in May. Have a look at what I’m seeing on each trading day of the Money Calendar next month.

How to Spend May "in the Money" calendarThis shows the total number of stocks I’m thinking of trading on, and whether the history is bullish or bearish. You can see, the bears predominate.

Judging by the Money Calendar, “buy and hold” investors may want to, well, sell in May and go away, but for traders, every day holds at least one opportunity to make some money.

If you’re trading on your own this summer, don’t plan on sticking with these trades for any length of time; stay flexible and nimble. It’s critical to know the history of the stock you’re thinking of trading, whether its moved up or down in the last ten Mays, and how long it took to make those moves, but think about trading puts and “loopholes” to make the most of what is almost certain to be a losing month on the markets.

On the other hand, we’ll be in touch every week to talk about the patterns I’m seeing on some stocks and how you can set up the best trades. We’re also going to look at real case studies of trades that did – or didn’t- work out We’ I’ll be in touch with you over the next few weeks about some of the stocks I’m looking at and the patterns I’m seeing, and we’ll be taking we’ll be working on specific trading recommendations to make the most of a long, “lazy” summer.

Here’s Your Trading Lesson Summary:

We’ve been on a nice bullish run since mid-February. But as we enter May, we’re going to start seeing the bears take over. Buy-and-hold investors might want to consider the timeless adage, “sell in may and go away,” while options traders might want to consider trading puts or credit spreads to profit in a bear market.

Until next time…

Good trading,

Tom Gentile

2 Responses to “You Have Two Weeks to Prepare for the Next Bear Market – Here’s How”

  1. Tom: Thanks for the tips on switching to bearish trades it not only fits with the market banging up against S&P resistance at 2137, but also confirms the old saw “Sell in May & Go Away” 🙂 Tom, YUM has fallen 36%, but I see YUM spiked up $5 during the first 15 minutes after earnings on April 21. should traders have exited at that point or get out of YUM now with the 36% loss ???

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