Stocks and shares are crumbling right now as fears over runaway inflation, ongoing disruption from COVID-19 and geopolitical concerns send the economy into a tailspin.
Investors are worried, and with good reason. The Dow Jones Industrial index is down 14% in the year to date, while the S&P 500 has lost more than 18% and the tech-heavy Nasdaq index has been eroded by more than 30%. Some of the biggest tech stocks have taken a hammering – Meta Platforms, the parent company of Facebook, is down 43% since the start of the year, while Netflix has lost a whopping 69% of its value over that time. Even formerly strong performers like Nvidia, whose stock rose dramatically during the pandemic amid a global shortage of computer chips, have been hit hard, down more than 40% in the year to date.
The carnage has spilled over into other markets too, notably cryptocurrency, which experienced a bloodbath earlier this month as one of its biggest assets – Terra Luna – was all but wiped out. The value of other crypto assets, including Bitcoin, Ethereum, XRP, Avalanche and Solana, has also been dragged down.
We’re officially in bear market territory and investors are rightly quaking in their boots as they ponder what to do next. Bear markets inspire a lot of fear because it’s a time when the price of seemingly every security falls sharply, followed by sweeping negativity that cuts across the market, leading to declining sentiment that only becomes further entrenched.
Some new investors may feel as if there’s nowhere to escape. Once the stocks begin to tumble it’s hard to know how long the bear market will last and where the bottom might be. Many will likely be tempted to sell their assets for cash or traditional stores of value such as gold and other precious metals. But cashing out also means missing out on the opportunity to “buy the dip” and make profits when the market re-enters bull territory.
The problem for investors is knowing when to buy in a bear market. Wait too long and the opportunity might be gone as the market suddenly rebounds – but pull the trigger too soon and the assets you’ve just purchased may decline further and further.
For now the market correction is not such a huge problem but there are real signs the economy could be headed into recession. The last time that happened, between 2007 and 2009, the Dow Jones lost more than 54% of its value. Prior to that, during the dot.com bust from 2000 to 2002, the same index corrected by more than 78%. So there’s a lot of money to be lost by simply holding tight.
The Best Bear Market Strategies
For new stock market investors who’ve enjoyed over a decade of almost nonstop growth, the prospect of trying to navigate the bear market can seem like a daunting one. They’ll likely be relieved to hear that there are a number of strategies they can employ, especially if they’re prepared to hold on for the long-term.
The 401(k)
Probably one of the safest strategies for investors at this time is to snap up index funds at regular intervals via a 401(k). The 401(k) is a retirement savings plan in the U.S. that provides distinct tax advantages for investors. They’re typically offered by employers, and give workers the option to direct a portion of their wage or salary into an account where income tax is deferred until such a time as they retire and withdraw it. Investors can opt to invest funds directed to a 401(k) into various securities, including stocks, exchange-traded funds, bonds and options.
Buying up stocks in this manner is a longer-term strategy that requires patience. The longer the bear market drags on, the more the value of the 401(k) will decline. However, that patience will be rewarded once the market finally hits the bottom and stocks begin climbing higher again.
During the last recession from 2007 to 2009, some 401(k)’s were cut in half, however those who held on were able to make huge profits as they acquired cheaper shares that had rocketed in value by the start of this decade, when the economy was going flat-out.
Trading Options Contracts
Investors who want to pursue a more hands-on strategy can attempt to use options contracts, which are a type of derivative investment that gives investors the right, but not the obligation, to make a trade in an underlying investment. Such contracts will have a specified expiration date, at which point a decision must be taken to execute the trade or not. They’ll also specify a strike price at which the underlying investment can be bought or sold.
One of the main options trading strategies during a bear market is to buy put options that offer a high reward potential with relatively low risk. To make a profit, the investor needs the stock price to drop below the put option strike price before the contract expires. If the stock price fails to reach the strike price, investors can decline to make the trade and only lose out on the contract fees.
A safer option is known as bear call spreads, which provides fairly limited returns with very low risk. The profit will be the premium paid on selling “out-of-the-money” calls, while simultaneously buying “in-the-money” calls. For investors that employ this strategy, they hope that the stock price will fall beneath the strike price of calls sold before expiration to maintain the premium. However, if the market moves in the other direction, the out-of-the-money calls acts as an insurance policy, limiting the investor’s loss to only the difference between the strike and stock prices.
A third alternative is bear put spreads, which involve buying an in-the-money put while simultaneously selling an out-of-the-money put. By doing this, losses are limited to the amount paid to enter the trade. This strategy can provide a fair return if the stock closes below the out-of-the-money put before it expires.
One of the best tools for trading options is Tastyworks, which offers low fees of just $1 per contract to open a position with standard options and zero fees when closing a position. The platform supports multiple types of options as well as derivatives, including futures and micro futures options, plus the option to trade those futures directly. In addition, it even covers options contracts for crypto with just a 1% fee on each trade.
Tastyworks also provides more advanced tools for experienced traders to identify market opportunities, as well as easy ways to roll an open position into a new expiration cycle.
Short Selling
The other popular bear market strategy involves attempting to short the market. Investors borrow stock they don’t own and sell it when the price is high, hoping to buy it back again after it declines. After returning the stock, they net the difference between the buy and sell price as their profit.
Short selling requires using financial instruments known as “contracts for difference” or CFDs, which provide an opportunity for investors to use leverage. Leveraged trading, as it’s known, allows an investor to trade a much larger amount by depositing a small initial amount of capital. Essentially they borrow the rest of the money required to open a position from their broker.
Traders aren’t required to pay any interest, however they are responsible for closing their position or keeping it open until it’s closed automatically via a margin call.
One of the most interesting options for leveraged trading is Gains Network’s gTrade platform, a Polygon-based decentralized trading portal that allows investors to bet on the price of stocks with leverage. Currently available in beta, its leveraged stock price trading tool enables investors to trade more than 20 popular stocks, including Apple, Meta Platforms and Alphabet, the parent company of Google. Its powered by the Chainlink decentralized oracle network to ensure each listed stock’s spot prices are accurate and updated in real-time. Under the hood, a its novel synthetic leveraged trading infrastructure is powered by the $GNS utility token and relies on two liquidity pools to execute all trades.
Leveraged trading on dTrade allows investors to benefit from median spot trading prices with 0% funding fees and 0% price impact. The main advantage of leveraged trading is that investors can open a larger position than they’d otherwise be able to do using their available capital, leading to much greater potential returns, though it can also amplify losses.
Don’t Panic!
The most important thing to remember in a bear market is the need to be patient and calm at all times. Investors should not rush to sell their stocks and get out of the game. Instead, keep hold of those assets and collect the dividends. Revise your portfolio, keep a close eye on the companies’ financial performance and act accordingly. Then, using the strategies described above, it can be possible to make substantial returns by betting on their short-term performance.
Margins and leveraged trading can become valuable weapons in a bear market. Use them smartly and they will serve you well. Just remember, it’s always possible to trade at a profit, no matter if the market moves up or down. You just need it to move.
