Don't be a crab during bear market rallies

Musings: How to take advantage of market upswings during a bear market

I have no doubt that we are currently in a bear market and that this is a short-term rally. If you disagree, then lets thumb wrestle to settle the matter :-)

The question on every investor's mind should be:

How can I take advantage of this bear market rally?

Let's stop worrying about how long it will last or whether we are at the bottom or whether I should wait and see?

The time for action is now!

Healthy signs

Look at the daily chart for just about any US or developed markets index. It looks like this SPX chart below.

Markets have steadily risen about 12% since the lows of mid-June. They have climbed above the 55day exponential moving average (yellow) and are deciding whether to make a run for the 150day simple moving average (orange).

Retail investor sentiment has improved slightly and they doubled their purchases last week, after holding back for almost 4 months. See this chart.

The buyback blackout, which is required during earnings season, is ending next week for a major chunk of companies. See this chart. These corporate buys will provide price support for any company that has an authorized share repurchase program such as AMD, NVDA and AAPL.

I suspect that institutional buyers are also slowly coming back. We will get more insight via their 13-F filings in a few weeks.

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So here is how I am taking advantage of this short-term bullish situation.

Selling my low-conviction losers

I have been waiting to sell a few small positions in companies that I no longer want to own. I do not expect these to recover back to their heydays any time soon.

Here is how I frame up my decision:

• Basic math: A 50 percent loss requires a 100 percent gain to recover and an 80 percent loss needs a 500 percent increase to get back to even.

• Crabs in a bucket: Like me, there are likely thousands of other investors who are hoping to recover their funds in these loser positions. As the stock price rises, they will be inclined to sell, putting further downward pressure on the stock.

Beachmanism: When I lose conviction in a stock, I exit the position as soon as possible.

Buying hedges

Especially during a bear market rally, I am interested in buying hedges when they are cheap aka when the market rises and when the VIX drops. I bought a small hedge position yesterday and plan to add to it as the opportunity rises.

Beachmanism: Buy hedges when they are cheap.

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Bottomline

The reality is that we will never make money on all our investments. There will always be some winners and some losers. I like to maintain a clean portfolio and move on to new ideas. You will not need to pry my junk holdings from my cold, dead hands.

And I try to use market volatility to my hedging advantage when I can.

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