Musings On A Bear Market Rally (Attempt)

Ah, the long-anticipated bear market rally. It's impossible to know how long it will last, and it would still be wise to wait for a follow through day (to use Investor's Business Daily lingo) before taking too much risk on the long side. That said, a move like this must be respected. Being too bearish in the short term could get you in trouble. Now, some musings.

--Why can't you be stubbornly bearish? The SKF (Ultrashort Financial) was down $44 yesterday and another $15 early today. Using stops on ultra ETFs is key.

--Why can't you be too bullish? The S&P 500 could trade up to around 1350 (another +8%) and still be in a clear downtrend. Here's the S&P 500 over the past year, with trend lines to help you see the range.

--Since August, we've had 4 rallies, documented in a previous post. During those rallies, the S&P 500 has gone up an average of 7.5% over an average period of 45 calendar days. The shortest rally was +4.3% over 28 days, the longest was +10.8% over 65 days. Remember that, when all seems well.

--My strategy: Stick with what's working (like biotech--IBB, CELG, GILD), avoid hyper crowds (like energy, financials), and stay hedged (with cash and the yellow bricks of GLD).

--That said, if oil stabilizes I like (for a trade) Continental Resources (CLR), which has the lead on a big oil discovery in the heartland of North Dakota. You betcha! Longer term, I like Brazil and Petrobras (PBR).

--With the Olympics on deck, is China (FXI, 40% off its highs) interesting again? Has the FXI (China ETF) found support for the 3rd time in a year around 120? Here's the 12-month chart, just begging for a trade with a stop placed at the green line.

--And if China looks okay for a trade, doesn't Chinese web / gaming company Sohu.com (SOHU) look even better?

--Is it too simple to just pick stocks that go "from the lower left to the upper right," a la Dennis Gartman? That is the definition of a trend, after all. (If you haven't read Gartman's Trading Rules yet, you should.)

--I can't stress enough how insightful Minyanville is. Here are 3 recent articles worth reading: The Future Is Now by Todd Harrison for witty context, Contrary To Popular Belief, Math Is Not A Rumor by Kevin Depew for economic explanations vis-a-vis Fannie and Freddie (and warnings of Depression), and Seven Rules Of Engagement by David Nelson for bear market trading tactics. I'm glad you read The Stock Surfer, but I urge you to read Minyanville.

--I'm beating the S&P 500 in 2008 by 8%, yet I give myself a C. Maybe that's harsh, but relative performance can't buy a cup of coffee if it's a loss. In my opinion, this bear market could last a while (years rather than months). We'd better get used to absolute returns, the kind that can buy things, rather than relative returns, which can't.

[Disclosure: Long IBB, CELG, GILD, SOHU, GLD.]