CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81.40% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Scan to Download iOS&Android APP

Bear market survival guide: Golden rules for trading in troubled markets

15:44, 16 May 2022

Share this article
In this article:

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
bull vs bear on top of a stock market newspaper
What are the best rules to follow during bear markets? – Photo: Getty Images

As the market moves further toward bearish sentiment, capital.com explores how investors can make the most of such a market.

The short term nature of bearish markets gives an advantage for active traders; however, there are plenty of other opportunities to exploit.  

1. Correctly identify a bear market

The measurement of a bear or a bull market is measured through its peak to trough.

As a consensus, a bear market occurs  when the market drops by at least 20% from its most recent high. Anything less than that is considered a correction.

What is your sentiment on US500?

3771.8
Bullish
or
Bearish
Vote to see Traders sentiment!

S&P 500 (US500) Price Chart 

What happens when only some stocks fall into a bear market while others don’t? For example, since its latest peak at the end of March 2022, Nasdaq Composite dropped by almost 20%, giving bearish signals. However, the S&P 500 (US500) dropped only 13% from its latest peak, Dow Jones (US30) fell by 9% and FTSE 100 (UK100) fell and then recovered almost fully.

David Jones, analyst at Capital.com says, if only some of the broader markets are falling close to 20%, this should be a strong enough signal for investors.

He says “Personally, I would apply it to stock market indices likes the S&P and Nasdaq – if the broader market has suffered a big decline then it is something that would concern investors, regardless if some sectors are suffering more than others.”

2. Once a bear market is identified, wait!

Coming to the conclusion that a bear market exists is subjective and an overall context of the broader market matters. Investors need to wait before they change their strategy to overly defensive. There are multiple factors to consider in each bear market, and this time is no different.

In an analyst note seen by capital.com, Virtus Investment Partners write about the contradicting signals we are currently seeing in the market. “Bear markets do not send advance warnings. It usually takes a surprise event to push markets into correction territory – such as the failure of Lehman Brothers which spurred the GFC [global financial crisis]. We might have thought that the war in the Ukraine and its aftermath (for example, the spike in commodity prices) would be enough of a shock. The reality, however, is that consumers in the US continue to spend, the housing market is tight, and corporates are delivering on earnings expectations.

US30

30,156.00 Price
-0.030% 1D Chg, %
Long position overnight fee -0.0139%
Short position overnight fee 0.0041%
Overnight fee time 21:00 (UTC)
Spread 2

US100

11,573.30 Price
+0.630% 1D Chg, %
Long position overnight fee -0.0139%
Short position overnight fee 0.0042%
Overnight fee time 21:00 (UTC)
Spread 1.5

DE40

12,482.50 Price
-0.540% 1D Chg, %
Long position overnight fee -0.0062%
Short position overnight fee -0.0017%
Overnight fee time 21:00 (UTC)
Spread 1.0

US500

3,771.80 Price
+0.150% 1D Chg, %
Long position overnight fee -0.0140%
Short position overnight fee 0.0040%
Overnight fee time 21:00 (UTC)
Spread 1.0

However they do warn there are some signs the market is begging to struggle: “We are starting to see some companies begin to lower guidance in the low-quality segment of the market. Companies with no pricing power are struggling to offset the spike in raw material costs and the disruptions to supply chains.”

But what if waiting makes you miss out on a bear market? Jones says: “It is always tempting to try and pick the bottom when you are out of the market. Don’t worry about this! You do not need to pick the bottom of the bear market to profit from the subsequent bull market – there is normally plenty of time to get back in on an upwards trend.”

FTSE 100 (UK100) Price Chart

3. Unique opportunities

Beyond the absolute rule of 20%, there are other trends investors could exploit within a declining market. Two notable trends pointed out by Fisher Investments are:

  • One third/two thirds rule: In their research, Fisher Investments found that during bear markets, one third of the value lost occurs during the initial two thirds of the bear market period. Two thirds of the value lost is during the last third of the time period. Simply put, during the end of a bear market, a sharper decline occurs.
  • 2% rule: in a bear market, the decline occurs at approximately 2% per month, which means the bear markets do not start with a sharp sudden drop, but rather as a slow steady decline. If a drop of more than 2% is occurring, the market maybe under correction rather than in a bearish sentiment.

4. Bear markets are short term

When duration is compared between both bear an bull markets, historically bear markets have sustained themselves for a much shorter period.

Raymond and James outlined the performance of the S&P 500 since 1926, revealing that while a bull market lasted on average 8.9 years, a bear market only existed for 1.4 years on average.

For investors to make the most of a bear market strategy they would have to think short term for their declining market strategies.

5. Plan for recovery, not just the dip

A new bull market begins once the market gains at least 20%. Bear markets are probably best seen as a time to plan ahead and to make the most of the upcoming recovery.

Jones says: “If you are a long-term investor then bear markets just give you an opportunity to buy in cheaper – particularly if you are paying into some sort of investment vehicle on a monthly basis. Bear markets give you a lower cost average in the end and, as we have seen historically, markets do recover.”

Read more

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Still looking for a broker you can trust?

Join the 450.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading