|February 12, 2016
Why I'm Confident I Can Buck the Bear Market
By Amber Hestla
There seem to be two kinds of investors right now: those who believe the next bear market is here and ready to destroy trillions of dollars in wealth, and those who proclaim every up day in the market is the end of the pullback.
This is largely the fault of the financial media, with bombastic bloviators shouting over each other on television and giving the impression that action is required right now. If you don't stay glued to the TV you might miss the start of the next bull market or get mauled by the bear!
Really, nothing could be further from the truth.
The argument that we are experiencing a pullback during a long-term bull market is difficult to make. I believe the bull market quietly died of old age sometime in the past year.
As we see on the chart below, stocks moved steadily higher from their bottom in March 2009 through July 2015, a six-year run. But the market has made little progress since the end of 2014. It has formed what looks to be an extended topping pattern and trended down since summer.
Still, this doesn't mean you need to panic.
According to a CNBC report, the average bear market lasts 15 months with stocks declining 32%. Currently, the S&P 500 is about 12% below its all-time high reached in May, which was a little more than eight months ago. If this is a bear market, there's much more pain to come -- and that means we need to act calmly to preserve wealth rather than reacting emotionally.
Bear markets are part of investing. In high-risk investing environments, we simply need to be more cautious.
If you're familiar with me, you know that my preferred trading strategy is to sell put options on high-quality stocks. Since I began Income Trader in February 2013, we have closed 122 winning trades in a row. And these trades delivered an average annualized return of 48%.
You might be thinking, "That's impressive, even for a bull market, but what's going to happen in a bear market?"
That's fair. Many investing strategies fall apart in a bear market. But I'm not worried about mine, and I'll tell you why.
First, for those of you not familiar with the strategy, when you sell a put option on a stock, you get paid cash upfront (known as a premium) for agreeing to buy shares if they fall below a certain price (the option's strike price) before a certain date (the expiration date).
With the vast majority of my Income Trader recommendations, the stock has stayed above the put's strike price and we have simply pocketed the cash as pure profit and moved on. That's because I only recommend puts with a high probability of expiring worthless.
But on occasion, the stock does fall below the strike price and we are required to purchase shares at that level. That is why I always do extensive research on the stocks I sell puts on and only recommended trades on high-quality names that I would be happy to have in my portfolio.
That way, even when you're "put" the stock, not only do you get to keep your initial premium, but you can often make even more money in capital gains when the stock turns up again.
That's as close to a win-win as you'll find in investing.
Since I think we are at the start of a bear market, I am being even more selective with the stocks I pick and only recommending those I think will hold up extraordinarily well in a down market.
Take the most recent recommendation I made to my Income Trader readers for example. It's a stock with a long history of persevering through economic challenges. It's reported a net profit for 77 consecutive years and paid a dividend for 74 consecutive years.
Knowing management places a high value on being prepared for future uncertainty gives me confidence in the company's ability to withstand a bear market.
In addition to promising fundamentals, the stock gave a "buy" signal based on an indicator I created to tell me when an individual stock's volatility has reached a short-term peak, allowing me to balance the potential risks and rewards of options selling.
While I can't share the specific details of the trade here, if you're interested in getting them and learning more about the benefits of selling puts, you can do so here.
Options & Income Strategist