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Step 1
Recognize that you're in a bear market. The market will be down at least 20 percent from its highs. Technical chart patterns will have distinctively bearish formations, marked by lower highs and lower lows. Prices that had previously supported market declines will be broken through and new lows established on a daily or weekly basis.
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Step 2
Sell stocks short. Shorting a stock involves borrowing shares from your brokerage firm and selling them to a third party in anticipation of a price decline. Once the price has declined as far as you think it will, buy back the shares you sold short and close the position. You should only short companies you think will decline the furthest in a bear market. For instance, if you think the stocks of technology companies with no earnings have become too overpriced in a bull market, they would make excellent candidates to short in a bear market.
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Step 3
Buy put options. Puts appreciate in value when a stock goes down, and depreciate when it goes up. You can also buy put options on major indexes like the NASDAQ or S&P. This way you'll be betting on the broader market instead of just one stock.
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Step 4
Purchase bear market funds like those offered by Rydex. These mutual funds use derivatives to create short positions on the S&P or NASDAQ. If the market goes down, the funds go up. Some funds use additional leverage to produce two times the inverse return of the index. For example, if the index goes down by one percent, the bear fund will go up by two percent.
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Step 5
Recognize when the bear market is coming to an end. The market won't go to zero. Once stocks have declined by a large amount, investors eventually consider them undervalued and start buying again. Oftentimes the bear market is closest to the end when the majority of investors and the general public are most pessimistic, convinced there are sure to be lower prices and rougher times ahead.
Comments
jackiekaching said
on 11/1/2009 I agree! Just because the overall market is bear doesn't mean a particular stock or even a sector is. Get out and network as much as you can, talk to people in an industry you are looking at to get a real-time, sanity-checking view on what's really driving demand. Then make your own call.
Magentaslb said
on 10/26/2009 Thank you for the advice! Will keep all this in mind...5*s
renewableray said
on 10/11/2009 Good advice to let everyone know, especially home gamers, that while this market is rallying we are still in a bear market and just going through a simple retracement. Even oil has just gone through what is known as a 50 % Fibonacci retracement and is likely to head lower now. Here is a great lesson on Fibonacci and how it works. > http://tinyurl.com/m4stke
scentbygod said
on 7/22/2009 Thanks...