Stocks for a Bear Market

[Smurf1976]

Without debating the probability of it actually occurring, which (if any) stocks ought to do well in an environment of declines in the overall market?

"Do well" does not "beat the market" by falling less than other stocks, it means that the price should actually rise and represent a profit when compared to holding cash.

The hypothetical scenario, which is possible, is as follows:

*Geo-political strife in the Middle East increases. Oil prices move to the front page of major newspapers.

*Stock market indexes throughout the world enter a steady decline. Assume the All Ords loses 40% over 18 months.

*General economic activity slows, house prices fall, the media talks of a recession. Non-oil commodity prices slump in response to the economy. The Australian Dollar falls sharply.

Now, without arguing whether or not the above is actually likely to occur, which stocks (if any) should INCREASE in price under such a scenario?

Gold and oil are obvious so we'll leave them out. Any thoughts on other industries or individual stocks which would actually benefit from such a bearish scenario?

 

[wayneL]

A couple of thoughts Smurf;

One of the great advantages of derivitives is that we can play the market both ways.

I think the best derivitive in case of a particularly nasty bear is options.

Why?

Looking past stocks that may actually go up in a bear, it can be very difficult to find stocks to short due to the cap on short sold stock.

CFD's...YUCK unlimited risk in more ways than one

Futures...great if the decline is orderly or you get in early enough otherwise better have deep pockets to deal with the volatilty.

Even with options, puts can be hard to come by in a crash scenario...but you can still construct bearish strategies with calls, which will be tradeable and you will be able to limit your risk.

As far as finding stocks going up, that is the great advantage of a technical approach such as techs system. If anything is defying the market your software will find it.

Cheers

 

[tech/a]

Smurf.

As Wayne points out there are a number of ways of trading a bearish period.
2002-2003 is one such period.

If like me you trade as part of your total investment plan and even so you feel more comfortable trading stock as your more familiar with it (Options are basically simple but even though we know we can quantify risk buying/selling 100s of contracts can be more daunting than buying 1000s of shares.)

During all periods of the market there will be out performers.
Trick is to identify them early enough to be able to stay with them.
Top down analysis (strongest sector/strongest stock)Is too slow as by the time you see it its done its job and out performed.

These times will be volitile so if long even the best stock is going to get hit by big moves in overseas markets.Its recovery and overall performance is what will set it apart.

We have to be prepared to take MORE small losses as we attempt to find the stock which moves against the tide.
I would be setting tighter stops and even cutting parcel size back to half and thus halving risk again.

If it does get going then Id be keeping the performers and dumping the non performers.If they triggered a buy again during that time Id be entering again.

Im going to have a look at the period I have suggested when I have time and do a bit of research into how many out performed and by how much in this time and see how a Breakout buy trigger would have performed.

Along with the 3000 other things on the cards.
Would be interesting though.

tech

 

[tech/a]

While not conclusive I took the period marked on the chart.
Ran searches for stocks that broke out in the BT margin list that Techtrader would have traded.

Not many were flagged infact in 2 weeks only had 8 prospects.
The results over that period showed small gains in some and small losses in others.On average no houses lost or wrists slit.As expected the bullish movement was stunted but not disaterous those selected and failures werent to bad either.

DDF 1.08 1.25
MGR 4.55 4.72
AGL 10.28 11.00
SGP 4.53 4.87
LSG 1.13 1.40

STO 6.07 5.44
AFI 5.21 4.85
JHX 6.13 5.78

 

[dutchie]

Thanks for the info Tech/a.

Good to know that its still possible to trade even though conditions are a bit harder and profits smaller.

So was that Bear period about a year with a 20% odd fall?

 

[doctorj]

The advantage we all have is that being private traders we don't have to trade. If we can't find any suitable securities, then we can go do something else with our money.

 

[tech/a]

From looking at the chart above Ive suggested that around 17/06/02 the lower support was taken out giving us lower lows and lower highs for the purpose of the exercise defining a bear market (Without reference to the dow and the transport index).and ending at March 2003 although we would not have known the end until well after that.I selected the figures and the worst of them between these periods.Infact because it was a breakout method of stock pick we were buying on a high in a bear period,making it even worse as you can see the Market dived mostly until March.

570 point fall or 17.5% fall in that time.

You maybe thinking of the 97 crash of around 15% in 4 days 23/10/97
to 28/10/97.

Its not conclusive but it is one of the longest bearish falls in recient memory that I could get a hold of.
I personally think the FEAR factor is bear markets is way over played.
If you have methods in place to minimise risk that impact on you personally can be minimised as can potential losses.Docs right we can do all sorts of things with our $$s

In 97 I lost 7K which at the time was around 1/3rd of my capital.I didnt know what I know now.I sold my entire portfolio (Mainly small caps with perfect timing(sic) 29/10) Had I not panicked I could have re couped all losses in a few months.But Thats part of the experience.

 

[GreatPig]

I don't know what's on the BT margin list, but GUD is one that performed very well during the 2002-2003 year (nearly doubled in price). If you'd bought when it broke above $2 in early 2002, you'd have been sitting on $4 by early 2003. 2005 has been the serious bear time for this stock, dropping from a high of about $11 down to the current price of $6.70.

Another that did well was GNS, rising from about $1.10 to $2.10 during the 2002 year. A logical buy point for this one would have been when it broke $1.20 in early 2002.

NCM is yet another, although it did fall a bit in the latter part of 2002. If you'd bought at the start of 2002 for $4 and sold in July for a bit below $8 though you'd have done well.

A number of others, like ORI, made more modest gains (about $7.20 to $10 for ORI).

Cheers,
GP

 

[Knobby22]

It really depends on why the stocks go bearish.
If it is due to the $A dollar falling then, I would buy mining, oil and export stocks such as Symex and CSL, also resort stocks.
If it was due to the US and Europe going into recession then I wuld buy utilities e.g. AGL Telstra.
If the reason the recession happened was because of an oil shock, I would buy Woodside. I think this is the best and truest blue chip in the market at present and probably would be a safe bet on the other scenarios also.

If it's because of a nucleur war I would buy food and medicines and live in Tazzy(hey there are people that bearish).

I read a Sci Fi story in a situation where civilisation had collapsed and this guy was selling his art collection bit by bit to get food. He had Andy Warhol's Cambells Soup painting. You can guess what he got.

 

[Warren Buffet II]

It really depends on why the stocks go bearish.
If it is due to the $A dollar falling then, I would buy mining, oil and export stocks such as Symex and CSL, also resort stocks.
If it was due to the US and Europe going into recession then I wuld buy utilities e.g. AGL Telstra.
If the reason the recession happened was because of an oil shock, I would buy Woodside. I think this is the best and truest blue chip in the market at present and probably would be a safe bet on the other scenarios also.

If it's because of a nucleur war I would buy food and medicines and live in Tazzy(hey there are people that bearish).

I read a Sci Fi story in a situation where civilisation had collapsed and this guy was selling his art collection bit by bit to get food. He had Andy Warhol's Cambells Soup painting. You can guess what he got.

Hi Knobby22,

Do you have any world kind of scenario to buy Banks? Just wondering..

WBII

 

[Knobby22]

If the bears are wrong as they usually are and you are nearing retirement, then buy banks and gambling stocks. Boring, reasonably safe but good dividends. Good to have some to balance your portfolio.

They have provided great returns but I think they are now yesterday's heros.


(Ths is my thinking, I could be wrong, do your own thinking)

 

[kooka1956]

I would look at a regular dividend return in a bearish market.Stocks offering solid yields such as the banks come straight to mind.A bearish market is a lot harder to trade than a bull,so at least you are getting a return for your money.
regards.Food ,entertainment and gambling stocks also normaly hold their own in a recession. Regards KOOKA