How to Profit In The Bear Market (Episode 33)

So thanks Kate. Good to be with you. And first I would say he's absolutely right. I'd love to meet him. yeah, because we obviously are looking at the same thing. And if there was ever a time that you can look at the S&P or maybe the NASDAQ and have it really be kind of spread across the whole market or let it be a sign for the whole market, it is now because things are acting in a highly correlated manner. The likes of which I don't think we've seen too often in my career of over 30 years. And so, yeah, I mean, you can look at risk on and risk off as basically the two investment flavors right now.

Yeah, so I cover about 200 ETFs in my own research. And if you look at almost anything in the equity market, you are gonna find that they're all moving in sync with each other. Not exactly, but highly, highly in sync. You are hard pressed to find at the market lows. We had recently something that is equity related and industry, a theme, a sector that is gonna behave much differently from the broad market, except maybe it's got a little more beta to it. In other words, a little more volatile. And, but in terms of finding sort of those needles in the haystack, maybe it can been done in the individual stock area. And I look at individual stocks by focus more on ETFs, but even when you get down to sort of micro sectors and themes, they're all kind of moving in the same direction. And they're all telling the same thing.

I would almost call this Kate a nickels and dimes market because you get all excited. You make a nickel, you make 5% on something. And then before you know it you've lost 10, and then you make another nickel and then you've lost another dime. And before you know it, this is exactly what the S&P and almost every equity chart that I look at looks like going back to January 4th to top, and probably even earlier, going back to November when all this really started to percolate and, you know, I'm happy to say that I've been basically be giving a documented play by play of this and almost everything I've said written and invested in, uh, since that time.

Well, what I would say first of all, is don't be like Charlie brown from the peanuts comics. Okay. If you go to my LinkedIn page, you will see that I have pinned a video of the classic video of Lucy from the peanuts comics. She's holding the football and Charlie brown is running up and kicking the football. And what happens every single time in the history of that show, he swings and misses because she pulls the ball away. He goes flying into the air. He yells out something that looks like, you know, a H H H R R R H. Okay. Something like that. I mean, I have the spelling, right. And, uh, he ends up flattering his back. And that's been 2022 for equity investors and frankly, for a lot of bond investors too. So how do you get around it? Well, the first thing is you have to embrace the idea that investing is not simply trying to profit from the market going up.

And that to me is the biggest missed education point of investors in my baby boom generation. And certainly those of younger investors, too, you know, a portfolio is more than what your latest trade is. And investment success has a lot more to do with running it either as a sports team, as an organizational, uh, unit, cetera, it all works together. And when you have a market like this, you pretty much have to say, alright, as opposed to trying to pick winners in a nickel and dimes market, you really need to focus on getting returns in a very different way than we did in the past. Namely, you have to combine whatever you've done offensively with a defensive component. In fact, and I'm not talking about outright market timing, I'm not talking about we're in the market, we're outta the market. We're in the market. We're short the market, okay?

Because that's just guessing. And as a 30, actually 42 year technician charted, since my dad taught me when I was 16, oops, give away my age there for those who are good at math. So with all those years of charting experience, what I see today as a chartist is that things are not working the way they used to. They still work. Charting is still to me, the mother's milk of investing. If you will. I dunno if I ever used that phrase before, but to me, it's the truth. Okay? It's the truth. Anybody can wax poetic about what they're doing, what they think they're doing. If we're gonna have a recession, what is the fed gonna do inflation? You know, where's it gonna be three months from now who cares? All you care about is the price of the things that you buy go up and don't go down.

And if they do go down that you take action quickly enough. So you avoid big losses and the charts are clearly telling us now that yes, as the article you referenced, this is not anything more than a temporary bottom. If it's a bottom at all. And the reason I say that is because I have to look, this is like a Missouri market. You know, it's a show me market, okay. And this market, and again, I'll use the S&P as a guide. This market hasn't shown me the ability to do anything other than rally within the same darn down trend has been in since early January.

Sure. So that old cycle of market emotions, that a lot of investors may have seen, if you Google it, , you'll actually see a lot of different versions of it. That wall street has used over the years. I created my own version, which I think is on the first page of Google, which is called the cycle of market emojis, where we put all different types of expressions, along with the words. And, you know, here's the thing, Kate, when you would think that with the S&P down 20 and the NASDAQ down 30 and bonds down 15, and, you know, individual stocks down 70 to 90%, if there were high flyers, that there would be some signs that this is sort of grinding to not a halt, but maybe the car that's been going in one direction, okay. The car has been going south is gonna gradually turn around and start to drive north.

And it's just not happening. It's not happening because, well, there's a million reasons why it's not happening. Some are in the news, but generally speaking, the equity culture is shifting. It is not simply see stock buy stock make money buy the dip is gradually, gradually being defeated. You would normally expect that after those losses we would have, if you look at the cycle of market emotions or emojis, you'll see anything like, you know, fear, despondent, anger, okay. What's just happened. I think there's a decent amount of that out there, but I still see more complacency than anything else. I think it's more likely that if you ask an investor, how they feel about the market, they will not say, I mean, cuz this is what I see. Oh yeah, look, it can always get better, but this thing can get way, way, way worse in a way we haven't seen in our lifetime instead you'll get an answer like, well, you know the market's down, but it always comes back right wrong.

It doesn't sometimes not for many, many, many years. And that's why you have to be more tactical and you have to be a combination of offense and defense. And you have to basically throw away most past performance of investment strategies before six months ago, because we have not ever had this combination of events. People will say it was like that in the 1970s, maybe it was, but you know what was not taking place in the 1970s, you didn't have instant communication where millions and millions and millions of investors around the world were all participating in the markets. You didn't have the transparency. So you can throw that out too. This is just unforeseen territory. I wouldn't say unforeseen, but I would say it's definitely a territory that we have not seen at the same time. You don't have to be an investment expert to figure it out. It starts with being a little more humble, a little more humility, a little less brazen and learning to be a defensive investor, not just an offensive investor. That's why, you know, again, I am, I sort of tag name for myself or nickname is defensive coordinator for I

So couple things, first of all, I've been saying for a long time and again, kind of have the receipts to prove it just on things I've written in a lot of places, bonds are the worst investment on the planet

Right now. Okay. They had a very nice run for about 40 years, the runs over because your choices are. And look, if you have, if you own individual bonds, okay. Assuming that the bonds will mature at some point, okay. But all you're doing really is you are locking into low returns with minimal liquidity because the bond market doesn't work the way it used to. The thing is everything that I say to you or to any, you know, group of investors, I would caution that, you know, I am less about predicting than I am about sort of understanding and then ultimately rationalizing so you can make coaching decisions. And when it comes to the bond market, this is not our parents bond market cake. Our parents bond market was the coupon clipping. Yeah,

So yeah, today the bond market and treasuries are one thing. Okay. Treasuries have some value. As long as the us is still considered, you know, the nicest house in a bad neighborhood when it comes to economic policy and you know, all the issues we've had fiscally, you know, for the last couple decades. But when you look at the bond market today, it is really controlled by a small number of ETFs. It's all just like everything else in our economy. It's all been kind of like Amazon. And I don't mean the stock. Okay. If you wanna buy high yield bonds and you've got your big hedge fund, okay. Or just a big money manager, you want exposure to high yield bonds as opposed to selecting individual high yield bonds. Boom. You buy some H Y G or J N K or one of the many other high yield bond funds.

And you're in high yield bonds. If you want corporates, it's L QD. Well that, and I think even with convertibles, things like that preferred stocks, okay. That is not a healthy future for the end investor, because it means that flows in and out of these things are going to determine the value of your portfolio. You know what I mean? So when we're looking at the bond market today, you have to look at it almost like they are a different form of equity. And based on the volatility this year, I would say so. Okay. But here's the great news. I may sound like a gloom and doer, but I've never been more excited than in my 36 year investing career. Never been more excited than right now. And here's why we have the tools. We have the Amazon Google okay. Of investment tools. A lot of it provided by MarketBeat.

I, I might add. And when, I mean the tools, I mean, if you look at the ETF market and I don't mean spy and cues. Okay. So let's go back to the topics we talked about. So if you do find a market segment, that looks good. Okay. Oh, I biotech looks like it's gonna do better than the broad market. Well, in a crappy market, you can buy a biotech ETF and you can buy an ETF that performs opposite of the S&P 500. And I'm not talking about double or triple cuz those can be poison, but you can simply say, I am long biotech. I am short the S&P 500 and a biotech outperforms, the S&P 500. It does not matter if they both go up or if they both go down, all that matters is the difference. Some people would call this arbitrage.

To me, it's just sort of pairing up things you like and looking at outperformance of the markets. And when you're looking at the potential, I mean, we had something happen that I don't think has ever happened, or maybe it's only happened a couple times, two weeks, consecutive weeks in which the S&P fell more than 5%. So when you're in that type of environment, the nickels and dimes, you make five, you lose 10, okay. And eventually it may be you make five and you lose a quarter as in a quarter of your market value 25%, but it happens faster than this first 20%. Did you get into that environment? You can't just say, okay, it's a lousy market. Let me find the best thing to buy because you're dealing with kind of like, what's the best of the losers. And I would much rather be looking at how I can always win in any condition, any environment. And that typically involves a combination of offense and defense, whether you're pairing them up, which is a little more, uh, strategy. People need a little more education, and I'm sure it's intuitive, but it takes a little bit of work and you have to have a method, but you can also simply say, and this is to me, one of the most frustrating things about 2022, observing the investment populous is that everybody seems to think that, well, what can you do? You just gotta go to cash and that's not true.

Sure. And look, I give you a lot of credit, Kate, cuz you are one of the people that's trying to broaden the recognition of these things. Okay. So I think of it this way. If someone were to ask me, well, what can you do in a down market? You just have to go to cash. Well, they're making the implicit assumption that if the market goes down, you can't make money. You can only make money when it goes up. Not true. And so when you have vehicles that are specifically designed to profit, when the market goes down, okay, they may decline in value when the market goes up. But again, that's how figuring out how to use them is the key. But the idea that you can't make money in a down market, you can make a ton of money in a down market. And you know, when it comes to what retail investors and traders are using in a lot of cases, I see they've got the right idea, but they're maybe gamifying it a little bit too much for my taste.

The double leverage, the triple leverage. I'm sure if the sec would let them, we would have a 20 times leverage. Okay. And look to some degree, I can see that I haven't really used them a lot in my own, uh, career, but I will say this if you're choosing between, let's say that and using options. Okay. Eh, I can maybe see a case. The problem is I see people sort of gun sling with these things and say, okay, I am putting, uh, a hundred percent of my portfolio in three times long. And then I'm gonna go a hundred percent, three times short. What did I say about the charts before they don't work the way they used to, you know, something that looks like it's gonna work out on a daily or weekly timeframe. And it folds, you know, like a cheap suit in, you know, a matter of a couple of hours or a couple of days, that's the nature of today's markets.

The market can't hold a rally. And if it's not holding a rally, but it's also not falling through the floor. Okay. Again, not a bottom. Going back to the original question, right? The bottoming process. Now I don't think so, but it's also not falling right through the floor. It's a market that even all the way down here, 20% of the S&P as we speak, you still have the buy. The dips has not been defeated to the point where people truly are despondent and they say, I want nothing to do with the stock market. That's when a bear market ends, not when everybody's looking for the bottom. So how do you participate in that? How do you capitalize on it? Well, without, before I even name names. Okay. What if there were a set of investments in ETF form that if you bought them and the market went down, the more the market went down, the more you would make, that would be really cool. Guess what they've been around for years, but people don't use them enough or they misuse them by saying, oh good. Can I have three times leverage on that? Okay.

Right? Exactly. Well, the prospects are pretty good on those. Right. But the questions do people read. Yep. So, I mean, if you, like, I define, I would say, eh, three to four different categories of et, I wouldn't even call 'em bear ETFs. I would just say ETFs, that can help you make money in a down market. Okay. That are specifically designed to capitalize on a down market. Okay. All right. So let's start with the basic, okay. If you wanna short the S&P 500, and you're not actually shorting, you're buying a security, so you don't have to worry about margin and all that stuff. Okay. You have to watch it carefully, but you don't have to worry about the margin. So simple sh look it up tons of volume every day, sh delivers on a daily basis, the exact opposite of what the S&P 500 does over time that can help you or hurt you if the market goes against you.

But the point is, if you want to capitalize on, let's say the next 10% decline or the next 50% decline, well, it's a pretty good arrow to have in the quiver. If you want to do with the NASDAQ, you can, you know, buy PSQ. If you want to do it with the Russell 2000, the small cap index it's RM, and you can use those things as the basis for the arbitrage thing I talked about before, oh, I think small caps are gonna get wrecked. But I think that there are a couple of sectors that may do fairly well. And even if everything goes down together, which they tend to do these days, everything goes down or up together. Like we said, well, I mean, if I can simply find something that will beat the small cap index for the next few months, I make a profit doesn't matter which direction they go and taking the directional, this out of this is something that a bear market almost pushes you to do, unless you wanna sit there and just pray every night that the bear market ends.

And that is not an investment philosophy. That is what we used to call hopium. So that's your basic, that's your market go down ETF, go up market, go up ETF, go down. All right. So it does the exact opposite. That's the sort of pure play. Then you have the ones that are kind of, they have that in it, they're sort of spring loaded, a couple that I have used in the past, and that are in my tracking, uh, system, a couple hundred ETFs. One symbol is T a I L. And what tail does is it does try to guard against tail risk. 90% of it is in treasury bonds, which means it's great. As long as treasury bonds, aren't falling with stocks and the other 10% is in call options. I should say, uh, put options on the S&P 500. Okay. And so what happens is that little 10% alongside the bonds kind of sits there quietly in a silent market.

Okay. And then when volatility kicks up and the S&P falls or even crashes, all of a sudden tail can take off and you can look at the history of how it's done. The other one in that category, I would say is, uh, symbol as D G it's run by Invesco. It's a little bit on the smaller side, but certainly a liquid enough for a lot of individual investors and kind of takes that 90 10 approach, same way, except that the 90% is in the S&P 500 index. The other 10% is in volatility calls. Meaning 90% of the portfolio is a plain old S&P index. And the other 10% is in basically profiting from rising volatility. So if the market rises, 90% of your portfolio is moving with it, and the other 10% is kind of waffling against it. If the market cracks, cracks really hard.

I mean, there have been times this year where the volatility index went, uh, you know, the VIX went up so much that the little 10% in the VIX calls negated the loss in the 90% that was in the index. That's like, wow, okay. So that's kind of a have your cake and eat it too. There are some environments where it can work against you, at least temporarily when you're coming down from high volatility to low, because 90 percent's going up, but the other part is crashing. So you don't make that much. But again, I encourage everybody to do their own research. And then last class pretty simple. It's to me is like the non levered, less speculative, more controlled way to do what a lot of people want to do right now, which is they say, I either wanna proffer from a big decline, or I want to be ready.

If all of a sudden they call off the dogs and the market goes flying, and the symbols are well, there's a few varieties of them, but Vixy, and V I X, Y, and SV X, Y all they do is they buy, uh, futures on the VIX, or they short futures on the VIX. And I have found that I can use these and not really even have to depend so much on options because, but here's the thing. They almost operate log options in terms of their volatility. You do not go and put 20, 30% of your portfolio in this, unless you're a gambler. Okay. You, if I have 5% of a portfolio in either one, it's a lot, and you can even use them together, if all you are doing okay. I mean, the thing that made it so that I was profitable in my main core portfolio during the five week calamity in 2020, we were up a couple percent market was down 34.

And one of the biggest things was, I just could see the volatility was gonna kick up. And that would probably mean a down market, but I just wanted to be on both sides. Well, Vixy S V X, Y that type of combination, if volatility, spikes, you got something that's really taking off. If volatility, plummets, you have something that's really taking off. You can, even if you hold them long enough, and the markets cooperate, you can end up making money on both sides. And if you are a hedged investor in this sense, and you have a chance to make money on both sides of a pair, that's a great thing.

Sure. And thank you, you know, and I would just say this, okay. We take for granted, everybody's learned how to play offense as an investor. Not many people have learned to play defense. Again, if you go to my LinkedIn, uh, page, you see a lot of my contact information and it says right up there, defensive coordinator for investors, how am I teaching that? Well, my website is sun garden, investment.com. We have a lot of things in the works there from a research and service delivery standpoint, and probably the best way. If somebody is interested, you can go to the website and kind of see some stuff. We even have our track record in there, audited track record in the case of some of the models. And it's also just simple enough, just contact me at Rob sun garden, investment.com. And I love to talk markets. I'm an investment lifer like you Kate.

Thanks a lot.