Are we in a bear market
How to use the bear market to your advantage
The effects of the coronavirus rocked the world's financial markets this year. Some investors have failed to learn how to invest in a bear market from the technology bubble of 2000 and the credit crunch of 2008. Knowing how to navigate these bearish market conditions is critical to protecting your portfolio and finding ways to grow it.
In this article you will learn:
- What is a bear market?
- The difference between a bull and a bear market?
- How to invest in a bear market phase and the different financial products available to you
- Whether we are in a bull or a bear market in 2020
- Strategies including sector rotation, safe haven investing, hedging and short selling.
- How Admiral Markets can help you trade in a bear market
… and much more!
Here we go!
What is a bear market or a bear market?
Put simply, the definition of a bear market is that of a market where prices are falling. This is commonly referred to as a bear market, which is a decline of at least 20% or more. This also applies to asset classes other than shares.
In defining the bear market, some consider a 20% decline from the asset's 52-week high to be critical. However, the US Securities and Exchange Commission defines bear markets as a situation where a broad market index falls 20% or more over a period of at least two months.
Bull Market and Bear Market: What's the Difference?
A bear market can be caused by a variety of reasons. The slump of the Great Depression of 1929 was the worst in United States history, with stock markets falling 90% in four years. Many analysts feared 2020 would be the beginning of a new major depression triggered by the economic repercussions of the coronavirus. Two other bear markets worth mentioning were caused by the 2000 tech bubble and the 2008 credit crunch.
In a bearish market, falling prices often fuel further pessimism, which can lead to a prolonged drop in the price of an asset. All upsurges in optimism are usually short-lived. Most bear markets are called cyclical bear markets. A secular bear market is a bear market that can last anywhere from five to 25 years. The term "bear" is used because of the way a bear falls down during an attack.
A bull market or bull market is the opposite of a bear market. It is a time when the market goes up aggressively over a period of time. The rising prices are attracting more and more people who also want to participate, which fuels further optimism and greed and drives prices up even more. A strong economy, supportive measures from the central bank and government can also help fuel a bull market.
Bull markets can appear in all different types of asset classes, such as stocks, commodities, indices, currencies, bonds, and even in cryptocurrencies. When US President Donald Trump took office in 2016, one of his first steps was to cut corporate tax from 35% to 21%. This helped fuel a bullish move in stock prices. In 2020, the coronavirus helped create a bear market in stock prices and oil, but it also made gold stocks bull.
Did you know that you can display price charts of various asset classes by downloading the MetaTrader 5 trading platform provided by Admiral Markets for free? To better understand some of the examples below, it might be useful to download the platform now.
How To Invest In The Bear Market
When deciding what to invest in during a bearish phase, the most important rule is to stay calm first! It is very easy to make emotional and irrational decisions. Taking a step back and understanding your bigger goals will help you decide.
While there are many different types of strategies to focus on during a bear market, there are two investors should consider - investing defensively through sector rotation and / or investing in safe assets like gold. In the following we consider both individually.
Investing in the bear market through sector rotation
The first thing to think about when investing is that cash is also a position. Preparing your portfolio for bearish conditions may mean reducing the risk invested in the market. Quite often, investors will also shift risk into something called a sector rotation to ensure that they invest most in sectors that tend to do better in a bear market.
One of the sectors that tends to do well in a bear market is healthcare. No matter what happens in the economy or in the world, people still need medicine and medical devices. Because of this, the healthcare sector and its companies tend to do better in a bear market.
Investors have many different ways to get involved in the healthcare sector. One possibility is ETF trading. ETFs (Exchange Traded Funds) are assets that trade like stocks and help investors get exposure to an entire sector rather than just a single company.
For example, according to the Health Care Select Sector SPDR Fund (XLV) factsheet, it provides "precise exposure to pharmaceutical, health equipment and supplies, health care and services, biotechnology, life science tools and services, and health technology industries" . Below is the long-term price chart of this ETF:
Source: Admiral Markets MetaTrader 5, #XLV, MN Chart - data range: from December 01, 1998 to May 15, 2020, accessed on May 15, 2020 at 12:18 p.m. CET. - Please note: Historical data are not reliable predictions for current or future developments, as circumstances can change at any time.
Another sector that tends to do well in a bear market is that of consumer staples. Just like in healthcare, people still need their basic daily necessities, such as personal care and cleaning products, in good times and bad. While investors can also use ETFs in this sector such as the Consumer Staples Select Sector SPDR Fund (XLP), they can also select individual stocks of consumer goods such as Procter & Gamble, Costco, Walmart and others.
Below is a long-term chart of Procter & Gamble's share price:
Source: Admiral Markets MetaTrader 5, #PG, MN Chart - data range: from August 01, 2005 to May 15, 2020, accessed on May 15, 2020 at 12:32 p.m. CET. - Please note: Historical data are not reliable predictions for current or future developments, as circumstances can change at any time.
The above monthly chart of the Procter & Gamble share price shows periods of sideways, upward and downward movements. Indeed, during the bull market that began with U.S. President Donald Trump's corporate tax cuts in 2016, the company's stock price did not fare well as investors chose to move into more growth-based markets.
However, some investors eventually began to buy back into the market as a defensive measure as the rest of the stock market reached the end of its bullish phase. In the same way, investors began to buy back into the company in early 2020 due to the bear market triggered by the coronavirus.
Did you know that the Admiral Markets Invest.MT5 account allows you to invest in stocks and ETFs from 15 of the world's largest stock exchanges? You can not only access gold ETFs and other stocks and ETFs, but also benefit from other advantages, such as:
- The ability to open an account with a minimum deposit of just € 1 and invest from just $ 0.01 per share with a minimum transaction fee of just $ 1 for US stocks.
- You get free real-time market data with no delays and no additional costs.
- Create a passive income stream by collecting dividend distributions.
- Use the world's most popular trading platform MetaTrader 5.
You can get started right away by clicking on the banner below and using the various functions!
Bear Market: Invest in Safe Haven
In times of economic crisis and uncertainty on the financial markets, the demand for safe investments tends to increase. In such situations, investors want to have a certain level of security and therefore use safe haven values for their investments. For example, investors can use the gold market to diversify their portfolio. There are a variety of ways that investors can access this. You can find out more about this in the article 'How You Can Be Successful With Gold Trading'.
Using exchange traded funds (ETFs) can help investors balance their stock portfolios. For example, the SPDR Gold Stock ETF (GLD), which was launched in 2007 and was once the second largest ETF in the world, can be bought and sold like a share. The aim of the ETF is to reflect the evolution of the gold bullion price, and it is the largest physically backed gold ETF in the world.
Below is the long-term price chart of the SPDR Gold Stock ETF (GLD):
Source: Admiral Markets MetaTrader 5, #GLD, MN Chart - data range: from November 01, 2004 to May 15, 2020, accessed on May 15, 2020 at 12:38 p.m. CET. - Please note: Historical data are not reliable predictions for current or future developments, as circumstances can change at any time.
The chart above clearly shows the long-term bullish direction of the market. While prices fell at the start of the 2008 bear market, they entered a long-term bull market in early 2009 that lasted through 2011. From the beginning of 2018, the price regained its upward trend and accelerated at the beginning of the 2020 bear market.
How to trade the bear market
While investors can use the two investment strategies mentioned above, there is also the option of using products like Contracts for Difference (CFDs) to trade various assets in a bear market.
This product enables investors to speculate on the price direction of an asset without ownership. In most cases, investors can also use the trading leverage, i.e. they do not need the full value of a position to open trade as assets can be traded on margin. The margin rate varies depending on the asset class and the categorization of the client - retail or professional client.
Bear market trading with hedging strategies
As investors prepare for a bearish phase, they may not want to give up on all of the investments they have built over time. Because, if you've managed to buy at a good price and it's a solid company that pays good dividends, you may want to stick with it for the long term.
In this situation, many investors may choose to protect their exposure by short selling a stock market index. Any potential gains from your short sale can offset any losses in your long-term stock portfolio. Of course, this is easier said than done and, as with any form of trading, involves different risks. However, it is a similar trading style often used by large multinationals looking to offset the cost of a rising or falling currency or commodity, as well as hedge funds.
The MetaTrader trading platform provided by Admiral Markets has 16 cash indices and 24 index futures that traders can speculate on. To place a sell or short sale on a stock market index, you must first open yours. If you have not already done so, you can start your free download here. Then follow these steps:
- Open the Market overview via the menu view on top of the platform. Or press Ctrl + M on your keyboard. This will bring up a list of symbols that you can trade with.
- Right click on the window Market overview and choose Symbols. Or press Ctrl + U on your keyboard.
- The window will then open Symbolswhere you can search for your symbol or choose from a selection on the left, e.g. Cash Indices CFDs. After selecting a symbol or a group of symbols, click Show icon or OK.
Source: Admiral Markets MetaTrader 5
To place a trade on an index, you must first open the chart by dragging and dropping the symbol from the market overview window onto the chart. Then you can just right click on the chart and trade and New order to mark. This opens a trade ticket:
Source: Admiral Markets MetaTrader 5
Did you know that you can test your trading ideas in both bull and bear markets by opening a demo account? This means that you can trade risk-free in a virtual trading environment until you are ready to go live! Open your free demo account at Admiral Markets now by clicking on the banner below:
Trade the bear market by short selling
Another strategy available to investors is to actively short sell stocks that are likely to perform worse in a bear market. In short selling, a trader essentially borrows the shares of a stock that they don't own and then sells them in the open market. He would then try to buy back those shares at a lower price.
CFDs allow you to take long and short positions in a variety of different markets. In this situation, the key is to identify the cause of a bear market and find stocks that are heavily exposed to it. For example, in the 2020 bear market triggered by the coronavirus, travel titles were hit hardest as countries closed their borders and imposed severe travel restrictions or bans. Airlines were hit hardest by this.
The Contract Details page helps you find all of the markets that you can trade. For example, shares in airlines. Some airlines are listed below:
Below you can see a long-term chart of the Lufthansa share:
Source: Admiral Markets MetaTrader 5, #LHA, MN Chart - data range: from September 01, 2012 to September 01, 2020, accessed on November 19, 2020 at 9:38 am CET. - Please note: Historical data are not reliable predictions for current or future developments, as circumstances can change at any time.
The bear market phase of 2020 triggered by the coronavirus turned into a market panic for most travel titles and airlines. The downward movement was very rapid. Adjust your timeframe to see the price action in more detail and take advantage of a possible decline in the stock's price.
Source: Admiral Markets MetaTrader 5, #LHA, D1 Chart - data range: from July 06, 2020 to November 17, 2020, accessed on November 19, 2020 at 9:42 am CET. - Please note: Historical data are not reliable predictions for current or future developments, as circumstances can change at any time.
The daily price chart of the Lufthansa share price shown above shows the speed of the price decline in detail. This enables traders to see market cycles and price action patterns in order to identify potential trading opportunities. However, we would like to point out that in some cases market regulators may temporarily prohibit short selling to avoid one day extremely large price losses that can cause problems in the market.
With the MetaTrader Supreme Edition from Admiral Markets you get a free upgrade to your MetaTrader 4 and 5.Numerous additional functions not only give you access to advanced technical analysis for a variety of financial instruments, but also to advanced order functions and a package of useful trading indicators!
2020: are we in a bull or a bear market?
In mid-February 2020 there was a market panic in the global stock markets, which caused some of the largest stock market indices in the world, such as the S&P 500 index, to drop by around 36% from its all-time high of around 3,395 points on February 20 Low of 2,186 points fell on March 23. This triggered a bearish development on the stock exchanges worldwide, as the weekly chart of the S&P 500 index shows below:
Source: Admiral Markets MetaTrader 5, # SP500, W1 Chart - data range: from February 12, 2017 to October 18, 2020, accessed on November 19, 2020 at 1:42 p.m. CET. - Please note: Historical data are not reliable predictions for current or future developments, as circumstances can change at any time.
However, historic actions by central banks around the world, including a US Federal Reserve stimulus plan of $ 2.3 trillion, helped equity markets recover some of the setbacks. This positive development becomes clear in the S&P 500 chart above. The value of the S&P 500 index has risen to a new all-time high since the major price drop in early March 2020.
After the historical volatility in 2020, the next big step could determine the long-term trend. Investors should pay attention to how quickly companies can regain momentum and the potential for economic recovery.
The fear of permanent influence from the corona virus is still causing some investors to remain cautious. However, with the right tools, products and strategies - as highlighted in the previous sections - you will be able to build diversified portfolios and also benefit from a bear market.
Why trade the bear market with Admiral Markets?
- Trade with a very well-established, regulated company supported by the UK Financial Conduct Authority (FCA), Cyprus Securities and Exchange Commission (CySEC), Australian Securities and Investments Commission (ASIC) and Estonian Financial Supervision Authority (EFSA) is regulated.
- Benefit from the Negative Balance Protection Policy, which protects you from negative market movements.
- Access the fastest and most popular trading platform, MetaTrader, which you can use on PC, Mac, Web, Android and iOS operating systems and is made available for free by Admiral Markets.
- Open an Invest.MT5 account to buy stocks and ETFs from 15 of the world's largest stock exchanges.
- Open a Trade.MT4 or Trade.MT5 trading account to trade CFDs (Contracts for Difference) to go long and short on a market and thus potentially benefit from rising and falling markets.
Start by opening a free demo account today so you can practice in a risk-free, virtual trading environment until you are ready to go live!
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This material does not constitute and should not be construed as investment advice, recommendation, or solicitation of any kind of transaction in any financial instrument. Please be aware that articles like this are not reliable predictions of current or future developments, as circumstances can change at any time. Before making any type of investment, you should consult an independent financial advisor to make sure you have the existing one Risks be able to understand and assess correctly.
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