How To Make Money In A Bear Market

We're seeing a lot of comments in various places (Reddit, Facebook, Twitter) that question whether it's possible to make money in a bear market. The short answer is yes, but it's complicated.

For example, at CakeTrades, our focus is on using our market top signals to help investors protect their assets and sell or hedge at the top.

In the case of novice or passive investors, it's best not to invest at all or to only invest in the absolute safest of assets and keep your funds liquid so that you can await a buyable low to begin scaling in.

In this post, we'll go into a bit more detail on how you can actually make money as an investor in a bear market, and why in most cases, you're better off waiting for a confirmed low rather than trying to buy on the way down.

Why focus on making money in a bear market?

A bear market is a period of time when stock prices are falling, investors are losing money, and participants are largely fearful. As a result, there are often fantastic opportunities that others may be too scared to embrace.

In addition, massive swings in market directions mean massive profits for those that are skilled in day trading or stock picking.

Here are a few tips:

1. Look for companies that are doing well despite the market conditions. Sometimes this is sector specific. For example, in the early parts of the 2022 bear market, energy products and companies outperformed the broad market significantly.
2. Consider investing in stocks that pay dividends. Dividends provide income even when stock prices are falling. It's important to remember though, that you should never be fully invested during a downtrend.
3. Don't panic. Remember that markets do not go straight down, and they do not go down forever. As Warren Buffett famously said: Be greedy when others are fearful.
4. Use this opportunity to scale into stocks at a discount. When stock prices are low, you can buy more shares for your investment dollar. This includes longer-term options, such as LEAPs.
5. Join a community with members experienced in navigating these types of market downturns. For example, our CakeTrades member community is full of investors skilled at making money during these bear markets.

Evaluating Undervalued Assets?

In a bear market, investors may look for opportunities to buy assets at a discount. These are assets that are trading below their intrinsic or true value but may have healthy balance sheets or strong growth opportunities.

During a bear market, many investors become forced sellers or sell out of fear rather than logical reasoning. In other cases, fundamentals can contribute to an asset being undervalued, such as a lack of investor interest, negative press, or recent underperformance.

Your job as an investor is to be able to tell the difference between the two, and scale into assets that were sold unreasonably with a high potential to bounce back first. Sometimes this can span across sectors. For example, growth stocks have been hit very hard due to falling bond prices and higher rates in 2022 and will be the first to recover when these conditions reverse.

However, this strategy is not without risk, as there is no guarantee that an asset will rebound in value, and it is important to do your own research and consult with a financial advisor to determine if it is right for you.

How to Monitor Market Sentiment and Opinion

When it comes to monitoring market sentiment and opinion, there are a few key indicators that can give you a good idea of how the market is feeling.

• Media coverage: How is the media covering the market? Are they highlighting the positive or negative aspects? For example, is CNBC showing their Markets in Turmoil Segment?
• Investor surveys: There are various surveys conducted by investment firms that can give you an idea of how investors are feeling. Examples are the AAII sentiment polls, and the Fear & Greed Index.
• Market volatility: This is a measure of how much the market is moving up and down. Increased volatility usually indicates increased fear in the market.
• The CakeTrades PCRI's: Our proprietary indicators provide insight into large, institutional flow before it manifests in price action, giving us an edge in selling tops and buying bottoms.

By keeping an eye on these indicators, you can get a good feel for how the market is sentiment is shifting. This can help you make decisions about when to buy or sell.

Keep A Cool Head in a Bear Market

When the stock market is in a slump, it can be tempting to make rash decisions in an attempt to recoup your losses. However, this is often the worst thing you can do.

Instead, it's important to keep a cool head and follow some simple rules if you want to make money in a bear market.

1. Don't become a Forced Seller: The first rule is simple: don't sell by force, such as via margin call or capitulation. Many people panic when they see their portfolios taking a hit and immediately start selling off their stocks. This is usually a mistake. It's important to remember that the stock market is cyclical, and what goes down will eventually come back up. By selling in a bear market, you're likely locking in your losses and missing out on the rebound when the market eventually recovers.
2. Look for Bargains: A bear market is actually a great time to start looking for bargains. Since stock prices are down across the board, you can pick up some great deals on quality companies that are temporarily undervalued. Just be sure to do your research before buying so that you don't overpay even for a bargain stock.
3. Protect Investments with Hedges: The CakeTrades market top indicator has caught every major market top in the past 10 years. It's important to have a tool like this to help you determine when to sell or hedge your investments. If you plan to hold through a bear market, then buying long-term index puts and/or selling calls against your position can be a great way to protect your funds.

Final Notes on Bear Market Strategies

When the stock market is in a bearish phase, it can be difficult to make money as an individual investor. However, there are some strategies that can help you trade in a bear market and make a profit.

1. Find a reliable signal to help you time market tops and bottoms.
2. Look for stocks that are undervalued by the market, and consider buying stocks that pay dividends.
3. Don’t panic and sell your stocks when the market is down.
4. Use stop-loss orders to limit your losses.
5. Focus on quality companies with strong fundamentals.
6. Save cash, and scale in.
7. Hedge losses with index puts or short call positions.
8. Be greedy when others are fearful.
9. Sell rallies, don't chase them.
10. When in doubt, sit it out.

Lastly, follow us on Twitter or join our free Discord to get access to CakeTrades research as we release it.