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Trading The Short (Bearish) Side...

Discipline And Patience Required

There is a great deal of "hype" regarding aggressive market timing, with timing services often advertising overinflated gains attained by trading both bullish (long) positions and bearish (short) positions.

The truth is that market timers "can" make excellent gains trading both sides of the market. But what no one tells you is that it takes more discipline and patience than most timers are willing or able to give.

Natural Upward Bias

There is a natural upward bias in the stock market. That bias results in long periods of gains, during which there are many short but sharp corrections to the upward trend. These corrections often do not last long and are "usually" impossible to profit from.

Often such corrections see most of their losses within the first few days. In fact, the markets can go for months and sometimes years without a tradeable decline. Declines must be long enough and deep enough for market timers, especially mutual fund market timers, to take advantage of them. Seldom do the financial markets oblige.

The fact is, using bearish (short) positions during upward trending markets often results in losses in those trades. Usually they are small, but they are losses nevertheless.

Typically we see many sharp corrections within long term upward trending markets, and if they are severe enough, they will trigger bearish signals.

But if the upward trend is still intact, the markets will reverse back up just as sharply. Often the resulting buying pressure causes traders to quickly exit short positions causing fast reversal rallies.

It is hard on the emotions when these quick trades occur. But aggressive timers who take both bullish and bearish trades know they must take "all" of the bearish trades because no one knows when the next bear market will begin.

All trades "must" be taken to ensure profiting when the bear returns. Bull and bear timers are willing to take the small losses, knowing they will eventually realize the big profits when the next bear market begins.

Fibtimer solves this problem by going to cash (money market funds) when we correct while we are in an upward trending market and especially when we are near the highs of an advance. We typically do not go to bearish funds unless we identify that we are in a bear market.

Time Frame

Aggressive timers with a realistic time frame (several years or more) will certainly see a correction that will be large enough to create substantial gains by taking bearish positions.

This is just the reality of trading. Bearish positions are riskier than bullish positions because the markets trend higher for longer periods of time than they decline.

Going For The Home Run

What market timers need to know is that there can be large profits made during long term declines (bear markets), but there can also be small losses during upward trending markets. These are usually small, but they can wear down the emotions, and cause a timer to leave a strategy.

Bull and bear timers must be willing and able to stand this test of time.

Aggressive market timers should know their tolerance for risk and their tolerance for taking small losses, while waiting for the big gain that may take some time to be realized.

If you feel you cannot stay the course for such a time frame, use bull only timing strategies which go to cash during sell signals, such as our S&P Conservative Strategy.

Conclusion

Don't be swept off your feet by hype and advertising. Bull and bear strategies work, but timers who trade them must be prepared to stay with them for long periods of time.

At Fibtimer, even though we have been market timing since 1980, our preference is to take bullish positions. We stay away from bear funds during upward trending markets and tend to use them only when we are in an identified bear market.

Yes, bearish positions do result in large gains during bear markets such as we experienced in 2000-2002 and again in 2008-2009, but such declines are not every day occurrences.

Fibtimer Subscribers

At Fibtimer, we offer strategies with both long and short trading because many subscribers want them. Even so we tend to stay away from bear funds during uptrending markets.

We offer many bullish only strategies with excellent long term performances. The Sector Timer for active market timers. The Conservative S&P and REIT Timers for conservative timers.

If you trade the ETF and Stock Timer strategies, but did not realize that short positions can result in small losses before finally paying off, consider taking long only positions. It can be quite profitable.

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