Ready Your Bear Market Strategies

The stock market is heading lower. There will be a little pain we will have to endure � but it will be expected.

Keep in mind there are investors out there who are clinging to hope. Day after day of red numbers in their brokerage accounts has paralyzed them. They want to sell, but they can�t. All that�s left is hope.

Unfortunately, the market doesn�t care about wishful thinking.

Yes, stocks rallied impressively into the close yesterday. It was an exciting development � yet I fear that moves like these will ultimately hurt more traders that they will help. The market simply is not in a position to be trusted right now, especially when it comes to upside moves…

The tape has been telling an important story. Days when the major indexes finish in the green have been especially telling. After all, it�s what�s happening under the surface that tells the whole story. For starters, the handful of stocks that initially moved higher while the market has corrected are losing steam. Last week, many of these momentum names had the wind knocked out of them. Semiconductors fell hard, anything related to China fell double-digits, and several prominent names rolled over.

Netflix Inc. (NASDAQ:NFLX) � what was just a couple of short months ago the best performing stock since March 2009 � dropped more than 10%. Another market favorite, Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), finished the day down more than 7%. These are only two of the more notable names.

We�re seeing the first signs of capitulation. The market is rolling over and the big money wants out. Therefore, you need to adjust your thinking and prepare bear market strategies.

Hopefully, you�ve already completed the hard part � walking away from losing longs. Now, you need to cautiously assess your options and seek out potential low-risk trades.

First, I have some bear market rules. This is a �sell the rips� environment. If and when you locate trading opportunities, we will need to narrow our time horizon and be ready to sell after the initial bull move is made. If the trend is indeed down, bullish counter reactions will be fast and brief.

Also, I would recommend you not to trade in size while the market is in flux. Smaller positions are key when it comes to capital preservation � and protecting your account from large losses should be your number one concern when the market turns sour.

Lastly, a quick note regarding selling short. Many novice traders will go �all in� on the short side in the event of a bear market meltdown. While this may seem like a profitable strategy on the surface, it can quickly lead to trouble. The markets biggest rallies occur during bear markets � and as we all witnessed yesterday, they can be swift and brutal. You need to be careful not to get caught holding large short position during these runs.

Maintain discipline and take profits early and often.