It’s not ironic that the S&P found some sort of floor near the round 20% decline “bear market” psychological level. It’s also not ironic that many of the favorite names had round number support near that level as well.It felt like clockwork that these levels were tagged just in time for CNBC to hit the “Market’s in Turmoil” graphic.

In the last couple of months there have been lots of questions and fears about this market as it seems all things are coming undone quickly.

Though no one has the answer, including me, I can share with what is, and has been, working for me during this bearish environment.

Anecdotally, I am up 58% year to date and have done very little in the last two weeks.

Have a Plan:

In bull cycles, a rising tide often lifts all boats. There was a forbes article from 2012 that illustrated a research project that tested to see if monkeys can outperform the market. That experiment found that 98 out of 100 monkey portfolios beat the market. We can get into they why/how this worked at another time, the point here is when you are dealing with a bull cycle a literal monkey can outperform. In simple terms, in a bull cycle you can make mistakes and still get away with minimal damage or even a profit.

In bear markets however, there's no forgiveness for sloppiness and failure. If you don't have a pre-determined plan to approach the market with disciplined risk management, you will more often than not lose money. This is why it is 100% necessary to always have a plan. If you have a plan and nothing on your plan happens, don’t trade. If you have a plan and things go against you, respect the plan. If you have a plan and your plan no longer works, figure out what is holding you back and adjust your plan.

In every one of these instances though, have a plan, trade the plan, and stick tot he plan for both winners and losers.

King Cash:

Going into the year I was very vocal about wanting to keep as much cash raised as possible. It remains "king." If you're struggling in this market, perhaps you should be focusing more on capital preservation. What does that mean exactly? Let’s keep this simple shall we?

  • Not sure what to do? Stay in cash.

  • Don’t like the risk reward? Stay in cash.

  • Took a big loss and feel the urge to yolo your paycheck? Stay in cash.

  • Random anon told you your favorite crypto is going to quadruple in a week? Go to cash.

  • Russia just invaded who? Go to cash.

  • VIX just broke 30 and you don’t like shorting? Cash is a position.

You get the idea…

The point of going to cash is to minimize errors.

Smaller Position Sizing:

This one is one of my favorite and simplest way to offset losses. It has been my anchor this year. I like to link this step with volatility. This allows me to scratch the itch of taking action while not losing my shirt in the process. The more volatile the environment, the less the probability for an outcome to occur.

ATR/Volatility Tells:

You can get a sense for how volatile a stock or ETF is through using an ATR indicator (Average True Range). This tool gives you an idea of how wide a range is on any given day. A cheap trick is to double a stock’s ATR when you have volatility heightened. So for example, when the VIX is trading north of 22 take a stocks ATR and double it. Though not exact, this gives a sense of how volatile/wide the ranges are. So, for example, if a stock I trade has an ATR that is $10 normally and now with elevated volatility sits at $20 it tells me that my position sizes should be cut in half and my stops doubled.

I keep the increase in ATR proportionate to the deviations int he VIX. So, again, keeping with the same example, if VIX is rising above 30, then 3 times ATR, etc.

The cap for me is at that 40 level on the VIX. Outside of exogenous events, whenever the VIX tags 40 it usually signals liquidity drying up and everyone throwing in the towel on some exogenous event. In events like this, spreads open up and only the fastest traders and algorithms benefit.

Shorting:

When markets break and volatility elevates it is prudent to “flip your charts.” This means exactly like it sounds, literally flip your charts upside down.

Betting the market goes down while in a correction is the proper trade to take and as such rallies should be sold. Some people avoid shorting because they are ethically dwarfed by the concept. If you’re one of those people, it’s best to just sit things out until the tide crests.

Being Wrong:

It’s common knowledge that it’s totally okay to have an opinion and to be wrong with the opinion. It’s not okay to stay wrong. It’s also a common adage not to try to catch falling knives. That said, if you’re going to take that sort of approach it is best suited to take these shots at critical levels. Taking shots at critical levels validates/invalidates the these pretty quickly and helps you avoid catastrophe. The other important thing to note is sometimes you will be wrong a lot. Taking multiple small losses will add up and compound to big losses quickly. That is also why it is important, in my opinion, to wait for critical levels before taking shots.

Major Headlines:

As briefly mentioned at the start, it’s not ironic that some of these themes get exacerbated near the seminal inflection points around “round” numbers or “headlines.” For example, the SPY found support near the 38% Fib and the -20% level which was the “Bear Market” inflection point.  

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