Stock Market Strategies: Trading In A Bull vs Bear Market

by Tim P. on 2012-07-229

Nobody can blame you if your views of the stock market have changed lately. Buy and hold investing is no longer as rewarding an approach as it used to be in decades past. With most decisions in life, no question has an easy answer and this is no exception. If there is an easy answer, it would go something like this: for the investor with a long term strategy of slow consistent growth over the course of a lifetime, there should be very few changes made to one’s investment portfolio. But these days, people have been more open to stock market timing and may mix their long term investing strategies with some technical analysis. If you’re open to this kind of approach to dealing with the stock market, then do read along.

A trader has a short or medium term outlook. They only invest money after careful research (a lot of free information can be obtained from your friendly neighborhood brokerage), and not only do they analyze stocks, but they also study the underlying market because they know that a lot of a stock’s movement is tied to the broader market. If you’re one of those traders, you know that your investment portfolio is constantly changing based on market sentiment. Every day you are called on to make a judgment about what’s coming next: A drop, a pop, or sideways action. How should your portfolio change when the bulls or bears take over?

stock market strategies, bull vs bear market trading

Stock Market Strategies: Trading In A Bull vs Bear Market

Let’s be honest. Knowing the next market move isn’t easy but there are some technical indicators that may help. First, look at the moving average. Technicians differ on the time periods they choose to analyze but as a simple exercise, let’s take a look at the chart below which portrays the 20 day moving average of the S&P 500 during a particular point in time (and which may not at all be reflective of the index today).

S&P 500 moving average 2010

A technician may say that because the S&P is trading above its 20 day moving average, this is a bullish sign. If the S&P 500 were trading below its moving average, this may be considered a bearish sign.

Looking at the same above chart, this particular example shows that a continued bullish signal is present. Not only is the S&P trading above its moving average in this chart but it has also broken out of its early August high of around 1130 and has continued upward since September 13th. Again, please note that we are using this chart as a point of illustration, such that the S&P is at historical price points.

There are many other indicators to study but before diving deep into technical analysis, these few indications are a good way to start.


One major difference between the amateur and the professional investor is that the pro knows that trying to score big is much more difficult than making a series of small wins. They also realize that it’s impossible to know exactly when the market will reverse its direction, so having trades in place that win regardless of where the market decides to go is pretty important. You’ll need to hold either “long” or “short” positions during the appropriate times. You want to be in a position where, regardless of how the stock market moves, you can make some money. With this in mind, remember that multiple small wins are better than one big win. Here are a few ways to hedge:

Shorting Stock This is the easiest way to hedge but it’s also the riskiest. Losses can be unlimited.
Buying Put Options Known as an insurance policy in the investing world, the loss is limited to the strike price.
Inverse ETF These ETFs rise in value when the underlying asset falls in value. Unlimited loss potential.

Not Your Typical Diversification Strategy

If you’re an investor, then you know all about diversification and are probably tired of hearing about it quite a bit. But here’s something not talked about as often: not only do you diversify your portfolio by investing in various sectors and asset classes, but you should also consider diversifying in terms of volatility. Volatility is simply the amount of movement in a stock relative to a broader index. Some stocks have a high degree of volatility and others have a very low degree. So it’s a good idea if you can develop a portfolio that contains a mix of high volatility and low volatility stocks.

Volatility is measured by looking at the beta. Beta measures the amount of movement in relation to the S&P 500. A beta of 1.0 means that the stock will move the same amount (percentage) as the S&P 500. The higher the beta, the more volatile is the expected behavior of the stock. A beta lower than 1 means that a stock moves less than the S&P on a given day.

Tips on Investing and Trading In Any Kind of Market

I’ve been trading for a little while and have picked up a few pointers here and there that I’d like to share with you. We welcome your ideas on this matter so feel free to add to or debate these points at anytime.

So, how do I do it? Following are some tips on how to adjust your portfolio as the market changes.

When you believe a bull market will continue, you may want to do the following:

  • Increase your percentage of high beta stocks.
  • Lower your amount of “short” hedges.
  • Look more for sell opportunities than buy opportunities.
  • Watch for sectors that may not be participating in the bull market. These may be buy opportunities.
  • Historically, good bull market stocks (in my opinion) have included Apple, Deere, Nike, Prudential (but make sure you do your due diligence before taking any action!)
  • Don’t let your guard down. The bull market will end sometime and you must be ready.

When you believe a bear market is imminent or you believe it will continue, here’s what to consider:

  • Get or stay defensive. Increase your percentage of low beta stocks.
  • Consider increasing your percentage of short positions, but do this very carefully and only if you’ve got experience. Short positions are highly risky.
  • Good stocks that are victims of a down market will become great buys. Watch for those and buy at a great price. Consider bottom fishing.
  • Be careful about buying sectors that don’t drop in value as much as the rest of the market. They may not offer the same value plays.
  • Examples of good bear market stocks: Johnson & Johnson, Proctor & Gamble, 3M.
  • In a bear market, hold stocks with high dividends.
  • Be patient. Things will eventually turn around.

Take a look at your portfolio and have a contingency plan for when things turn the other way. Try to remain a step ahead of the market as much as possible. Now if you’re a passive investor, make sure you pick the right fund managers who will successfully perform this work for you.

Created October 10, 2010. Updated July 22, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.

{ 9 comments… read them below or add one }

Rob Bennett October 11, 2010 at 11:47 am

Timing isn’t only for those with a short-term or medium-term outlook. I practice long-term timing. That is, I set my stock allocation by looking at the likely long-term return for the particular valuation level that applies at a give time and comparing that to what I can get from super-safe asset classes like TIPS and CDs.

I’ve been at zero stocks since the Summer of 1996.


Hollis Colquhoun October 11, 2010 at 1:35 pm

Good article – trading daily in this market with the economic and political environment can tear your hair out. I worked on Wall Street as a trader and institutional salesperson for 20 years, mostly without Bloomberg and program trading. The traders and broker’s brokers maintained the markets. Now hedging is certainly a good way to go if you’re going to take the plunge into the trading melee.

Andrew @ Credit Card Andy July 22, 2012 at 9:26 pm

With all due respect, I don’t believe “How should your portfolio change when the bulls or bears take over?” should be a question that most investors or readers should think.

The “smart financial choice” would be to maybe consider purchasing more shares of the companies/funds you think will outperform in the long run. Or even just the market index.

Encouraging the average investor to try active trading seems misguided. It’s very easy identify bull and bear markets a priori (looking back), but hard to do so in the moment. If professionals with access to more information who actively trade struggle beat the market most of the time, amateurs are likely to find it difficult as well.

If this article warned readers to spend a lot of time doing homework on investments, I think this would be a good starter piece. I think most investors would be better served focusing their attention to low-cost ETF’s and mutual funds.

Silicon Valley Blogger July 23, 2012 at 7:28 pm

Thanks Andy. This is certainly one way to look at things. I have been an avid asset allocator and proponent of indexing for a very long time, but with the years and experiences I’ve built as an investor, I’ve realized that you can “never say never”. For example, if you’ve been a buy and holder for the last 10 to 12 years, you wouldn’t have gone that far relying on an equity heavy portfolio to increase your net worth.

While active trading isn’t something I’d advocate for the average investor, I’m all for advocating increased education covering the general market and economic environment we find ourselves in. We should all be aware of what happens when bull and bear cycles hit and what consequences we will end up facing due to market trends. Then it’s up to ourselves to make a decision about what to do and how to act with the knowledge we have.

William @ Drop Dead Money July 26, 2012 at 5:08 am

My take has been one of moderation. At my core, I’m a long term hold bull. I simply don’t have the stomach for the risk more active trading brings. Tried it, lost every time. 🙂

That said, I agree with the fundamental point that there are times when you need to have an open mind and not be dogmatic. In the last few years I’ve found myself more and more gravitating to dividend paying stocks, because that establishes a baseline return. And, as I hear the mutters of a possible fiscal cliff induced premature recession building into a chorus, I think it would be unwise for me to stay fully invested. Of course, I’ve been wrong before… 🙂

Silicon Valley Blogger July 27, 2012 at 5:48 am


The current environment does favor high dividend paying stocks — with so much uncertainty in today’s markets, seeking out quality stocks can mitigate your risks. I confess that I used to be more comfortable with the buy and hold approach, but the 2008 crisis looks to have changed my mind about that particular strategy!

Soullfire July 29, 2012 at 6:31 pm

It’s important that people realize that risk in general comes from being in the market before any type of strategy is considered.

The nature of the market dictates that we ALL need to be market timers to a certain degree. Even the die hard buy and holders still need to know when to start moving their assets to lower risk investment vehicles as they move closer to retirement.

More importantly, everyone needs to be alert to significant changes to their portfolio and make adjustments when the time calls for it. There is no rational reason any investor should suffer a 40% loss such as the market handed out in 2008 if they were properly managing their risk.

At it’s simplest level, there should be emergency exits triggered at some value, say around 20%, to protect ones assets from more serious damage. At the same time, some profits should also be taken when an investment is up 20% or more during the year. This will allow you the option to reinvest at lower levels if and when the market declines.

There are times when the market is not trending Bullish or Bearish, but ranging between prior highs and lows.

During the course of a year, a particular stock can soar to amazing heights and gut wrenching lows before ending the year flat. Just putting simple triggers in place would help take advantage of those moves.

Timing is really about just managing risk. Buy and holders should be doing it in a longer time frame than swing traders, which is still longer than that of day traders.

Shorter time frames require faster analysis and action which is why short term trading has a higher difficulty factor along with the potential for higher rewards.

Technical analysis is a must for anyone interested in getting better at timing in all time frames. Using the news headlines as an indicator is not effective as the market tends to act bipolar with news – ignoring it altogether or overreacting depending on the occasion.

Silicon Valley Blogger July 30, 2012 at 5:32 pm

I’m on the same page as you Soullfire. When people discuss timing, it’s usually with regards to making a profit via trading. But I like the perspective that “timing is about managing risk”. If you think about it that way, it doesn’t mark timing as all “bad” but justifiable in certain circumstances. I know choose to be more flexible about making market moves for risk management reasons.

I also appreciate your view on tech analysis. If you are to time, some understanding of such strategies will prove helpful, if not essential.

Chris McCamey August 2, 2012 at 8:19 am

Interesting comments above. Here’s a strategy that uses technical analysis for signal time frames between 10 days and 8 months.

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