Hey Rookies! How are we this week? We are continuing down the self-isolation path and hopefully you are holding up well. These are indeed strange times both from a life perspective and a trading perspective. I say that these are strange times because that has been my experience. I have been on this planet for a while and never experience anything like the situation we find ourselves in at least from a life perspective. I do know however from a little bit of research (googling) that this is not the first time we have been asked to stay in our homes. Check out this poster below.

You can see that this type of thing has happened before but I call these strange times because I was not around for the Spanish Flu Pandemic of 1918. I suspect most of the folks reading this blog were also not around for that time either so I think we can all agree these are strange times. One thing that is not that strange or at least shouldn’t be if you are a student of the markets is that of a bear market. I understand many folks have a short memory when it comes to harsh times but it was a mere 12 years ago when we had one of the roughest market meltdowns in the nation’s history due to the subprime debacle. So, if you are a student of the markets or you are just delving into the markets, ie rookie, then today’s blog will hopefully be enlightening when it comes to how bear markets tend to act and that the one we are seeing right now is not really acting all that strange.

From all the feedback I have received in the last couple of weeks regarding current market conditions I would say we currently have a couple of factions that most trader/investors find themselves in. Those two factions are as follows in my opinion, one is we are full-on bear and the other is this is the time to load up on cheap quality companies. The way I see things using my trading experience and my ability to see the things happening around me is that I am leaning closer to the first faction. Please allow me to explain why that is.

Let me start with the experience part, I remember 2008 very well as it was shortly before that when I started investing so the lessons run deep for me. Some of my other experience comes from my mentors and my training and the one thing that is currently ringing in my head right now is markets never go straight up or straight down. Now, you may ask why is he thinking like that right now? Well, that is my focus because I am seeing one of the major PITFALLS of a bear market and that is the bear trap! Check out the chart below and see if you can see what I am seeing.

If you look closely at this chart you can see that bear markets like to fool folks into thinking they are over by creating these crazy rallies that give everyone hope that the carnage has ended. You can see twice on this chart where the SPY rallied huge only to hit a resistance level and turn back down. The second one was particularly juicy as it had some up days that rivaled the down days we have seen recently. You can also see on this chart that the SPY has again turned lower. This is a classic bear trap! A crazy rally followed by another sharp decline. So, I know what you’re probably thinking….why is he telling us what we can already see and what we need to do about it?

I’m glad you asked. There is a multitude of ways to determine whether a bear market is changing its tune and I couldn’t possibly go through all those things in this blog but I will tell you what I am looking for before I am ready to believe that this bear is done clawing its way to the downside.

When I am looking at any trade I am trying to think about any number of things but what has served me best in the past is trying to think logically about the situation and then trying to put myself into the situation from different perspectives and trying to think about how I might react to the situation? For example, let’s say I am trying to figure out what plane travel will look like into the future, post coronavirus? If I ask myself, will it be the same as before? The logical answer to me is no. Then maybe I ask, what things will I need to do in the future before boarding a plane and will this make travel more expensive or less expensive? The answer I have in my head for that one is that there will most likely be more things to do before getting on a plane, maybe like getting your temperature taken or answering medical questions before boarding? If this is the case then I believe air travel could become more expensive as more equipment or more people may be involved in this endeavor. So, if that’s the case then do I think there will be more or fewer people flying in the immediate future and will this hurt the bottom line of the airlines? You see what I am doing here is trying to think fundamentally about what is happening before making a trading decision. I may not be right about the subject but I want to give it some thought anyway because it may keep me out of a trade or put myself in a different position regarding the trade. So, in the case of the overall markets, namely the SPY chart above, I am looking at the fundamentals of the situation before I am ready to concede to the reversal of the bear market. In this case, I would want to see some concrete evidence that the virus is under control or that we have a solid plan in place to deal with the issue at hand. The second thing I am looking for is a technical reason to enter the market from the other side. For example, in the chart above we have had two v-shape recoveries since it started falling and both have failed. I learned from my mentor along time ago that v-shape recoveries tend to fail a lot and that rounding bottoms are more conducive to reversals. So from a technical perspective, I could be looking for a rounding bottom in the SPY before believing that it is ready to turn. Now, we don’t always get the technical signal we are looking for and so I might also be on the look out for a double bottom pattern here as well because the current fall started from a double top and so it stands to reason that the next up leg might start from the opposite pattern.

I hope from this discussion you can see that a bear market is fraught with PITFALLS but if we think about the fundamentals and the technical picture as a whole that we may be able to avoid those bumps along the way.

Trade well

Coach Holmes

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