Bear market bounces are fun to watch, but hard to trade.
Market Narrative
The dominate market thesis lately was higher rates is bad news for equities, so why take any risk. Nobody did and down go stocks.
However, the tone changed on September 28th as US 10yr yields peaked a hair under 4%. Since then, rates are trending lower and have room to go, according to the charts. A retreat towards old overhead resistance at ~3.4% is likely.
If this plays out, stocks have the wind in their favor, at least in the short-term. Is this an end to the bear market, probably not, but the opportunity looks juicy.
Stocks are bouncing hard off the June lows. Back on Sept 30th stocks failed to breach the June low, since then its been a violent reversal to the upside. See chart below.
S&P 500 Index ETF – SPY
Notice the GAP higher this morning. To me this is shorts covering, nothing more. That doesn’t mean stocks can’t rally higher from here. Sure they can. In fact, the first overhead resistance sits at around 390.
Current Views
To be sure, a little risk goes a long way in a bear market. Bear market rallies are swift and easily trap the “buy the dip” crowd. I think the market is ripe for a bear rally. No time to wait.
In light of this view, going long SPY at 376 makes sense, and risk management is tight and simple. Stop-loss is set at 366.48, just a hair below today’s low. If things work out, I’ll trail the stop higher and try to catch the meat of the move.
I like trades like this where risk management is fairly easy to define and bear market trading strategies have been working great this year. Go with the flow.
Conclusion
Bear market bounce? Definitely maybe.
Bear markets are never fun. Worse yet, bear market rallies are tougher to trade. A bear market bounce is a death nail to the “buy the dip” strategy.
As I’ve said in the past, trading without a plan is a guaranteed ticket to the poor house. So, please don’t do that.
Long-term passive investors care less about short-term fluctuations like what I’m describing here. They play the long game and don’t fork over a big chunk of their wealth in transactions fees.
Thanks for reading!
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Invest at your own risk. Trade your own view. Do your own due diligence.
