As you most likely already know, the market has been a bloodbath over the past month or so due to fears of the coronavirus and its effect on the economy. Businesses have been closing and people have been ordered to stay at home to prevent the spread the disease. Inevitably, this will affect the economy and the stock market. Since all of this started happening, $SPY (the ETF tracking the S&P 500) has fallen over 35% from its high of $339.08 in February 2020 to its recent low of $218.26 in March 2020.
A lot of people are under the impression that money can't be made in the market with such bearish conditions, which is not true. A bear market actually offers plenty of opportunities that are not always available in a bull market. In this post I'll be sharing some tips on how to handle the current market conditions, and how you can take advantage of it for both day trading and long-term investing profits!
When it comes to day trading in a bear market, it's extra important to manage your risk. Bearish conditions typically bring along increased volatility in the market. That volatility is a great thing for day trading... but it can also be terrible thing. If you're not properly managing your risk, you should expect larger drawdowns and losses on your positions than you're typically used to while the market's volatility is high.
Obviously this is something most traders want to avoid, because managing risk properly is the name of the game. Because of that, I recommend trading with smaller-than-usual position sizes to offset the increased volatility. For example, if an average day trade position size for you is $10,000, you may want to try cutting that down to maybe $7,500, $5,000, or even less to avoid dealing with increased risk in a volatile market.
You may be worried that smaller positions will also take away from your profits, which should not be the case. You have to keep in mind that the increased volatility also can work in your favor when you're on the right side of a trade. If done properly, you should be both risking and profiting the same as you would on an average trade, even with a fraction of the position size.
Position size aside, it may be more difficult to find winning trades in a bear market if you only buy and sell. Instead, bear markets offer great short-selling opportunities. Short-selling lets us profit from stocks going down, which can be a huge benefit in the weakness of a bear market.
Here's a rundown on how short-selling works:
1. You place an order to short-sell 100 shares of stock symbol ABC.
2. That order automatically requests to borrow 100 shares of ABC from your broker.
3. You sell the borrowed shares when you believe the price is going to go down.
4. Later you buy back the shares (or cover), which automatically returns them to your broker.
5. You either profit or lose the difference between where you bought and sold, multiplied by the number of shares traded.
You always want to buy low and sell high in the market! The only difference with short-selling is that you're selling high first and hopefully buying low after, which is easier in a bear market.
Even though I personally am mostly a short-term trader, I'm still excited about the long-term investment opportunities that this market selloff will offer too. Eventually, $SPY and the S&P 500 will be back at their highs. This selloff is only making the future return to the highs more profitable for those that take advantage of it!
Now is not the time to afraid of the market and not the time to be afraid of losing... even though most people are. Warren Buffett even said "Be fearful when others are greedy. Be greedy when others are fearful." The fear in the market is higher than it's been in a long time, which means it's almost time to get greedy and buy, buy, and some more.
Although, it's important to not buy all at once. You can never expect to buy at the exact bottom, so it's better to slowly build a position over days, weeks or even months rather than buying your full position all at once. If you're planning on investing $10,000 into the market, you may want to buy $2,000 at a time as the price bottoms out.
Alternatively, you can also wait for the bottom of the selloff to be confirmed and for the price to start bouncing back up. By doing this you're guaranteeing that you are not buying the exact bottom, but you can also be confident that the selloff is over and the price is likely to start its climb back up.
Regardless, there is a lot more strategy to investing than most people think. You can't always find winners by buying into well-known companies. You should be doing some fundamental analysis to find strong companies that will survive a recession and even out-perform the market. Looking for things like quarter over quarter and annual EPS growth, growing revenues, and high institutional ownership is a great start for a long-term investment.
On the technical side, it's best to see that the individual stock is performing better than $SPY and the S&P 500. As I mentioned, $SPY is currently down about 35% from its highs at the time of this writing. A good investment is likely to also be dragged down by the market, but not a full 35%.
I hope this post calms some nerves about the current market selloff we're facing and gives you some ideas on how you can take advantage of it. If you're ready to learn step-by-step trading and investing strategies, get started with one of Master the Market's courses!
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