Trading The Short
The Truth Behind The Hype
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.
Read on for the "truth behind the hype."
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 without a tradable 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 (bear fund) positions
during upward trending markets would often results in losses
in those trades.
For this reason, Fibtimer typically moves
to a cash position when the markets are near their highs.
Cash protects against further declines, and does not lose
money when the markets reverse back to the upside, as they
so often do.
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 are better safeguarded by being in cash if
the markets correct from their highs.
Only when the stock market is in a long term
decline or a bear market does Fibtimer enter bear fund
positions. In such conditions, bear fund positions can
create substantial profits.
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Aggressive timers with a realistic time frame (several
years or more) will certainly see a correction that will
be long enough and deep enough to create substantial
gains by taking bearish positions.
If you want to use bear funds, you must have a long
term horizon, and be willing to wait for those big declines
(bear markets). 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.
We only use them when we are in a bear market.
Of course years 2000 through 2002 were bear market years
and the Bull & Bear Timer greatly outperformed all
the other strategies. The same thing occurred in 2008-2009
when we profited using bear funds.
But when will the next bear market start?
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 until we have a bear market, it is better to use
cash positions during sell signals to protect against
loss, yet not cause additional losses if the markets
reverse to the upside.
Bull and bear timers must be willing and able to stand
this test of time.
Market timers who trade both bullish and bearish positions
should "expect" that they will need to trade for several
years before using bear funds. It is not safe to use
those funds near market highs. The risk of losses is
far too great.
Those who trade bearish positions are going for the "home
run." But you must recognize that home runs are not hit
every day. You may go a couple of years between them,
or even longer.
If you feel you cannot stay the course for such a time
frame, use bullish only timing strategies like out S&P
Conservative Timer, which goes to cash during sell signals.
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
At FibTimer, even though we have been market timing
since 1982 (online since 1996), our preference is to
take bullish positions. We trade our own accounts using
the Diversified Timing Portfolio which allocates only
a limited amount (20% maximum) to bearish positions.
Remember that Bearish positions should only be used
in very specific conditions.
Yes, bearish positions do result in large gains during
bear markets such as we experienced in 2000-2002 and
2008-2009, but such declines are not everyday occurrences.
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Disclaimer: The financial markets are risky. Investing is
risky. Past performance does not guarantee future performance.
The foregoing has been prepared solely for informational
purposes and is not a solicitation, or an offer to buy or
sell any security. Opinions are based on historical research
and data believed reliable, but there is no guarantee that
future results will be profitable.