How to be safe at the top of a bull market


With the U.S. stock market in the final innings of this bull market, some bullish investors and traders are starting to become nervous. They’re wondering “should I go long right now, with the risk that a bear market might begin in the next few months?”
Here’s the good news. Let’s assume that you go long right now, then the S&P 500 makes a new all-time high, but then sinks into a bear market very soon.
There is no need to panic. Bear markets don’t go down in a straight line.
Let’s assume that you go long, and then you’re caught on the wrong side of the bear market. The bear market’s downtrend will be very choppy initially. There will be several large bounces. Wait for the market to make a bear market bounce, and then get rid of your long position.
Here are the historical examples.
This is the S&P 500’s 2007-2009 bear market. The stock market fell from October 2007 – March 2008. Then it bounced from March 2008 – May 2008. This bounce saw the S&P retrace more than 50% of its decline.

This is the S&P 500’s 2000-2002 bear market. The stock market fell from March 2000 – April 2000. Then it bounced from April 2000 – September 2000. This bounce saw the S&P almost make a new all-time high (a flat top).

This is the S&P 500’s 2000-2002 bear market. The stock market fell from September – October 2000. Then it bounced from October – November 2000. This bounce saw the S&P retrace more than 50% of its decline.

This is the S&P 500’s 1973-1974 bear market. The stock market fell from January – August 1973. Then it bounced from August – October 1973. This bounce saw the S&P retrace almost 61.8% of its decline.

This is the S&P 500’s 1968-1970 bear market. The stock market fell from December 1968 – January 1969. Then it bounced from January 1969 – May 1969. This bounce saw the S&P retrace more than 61.8% of its decline.

This is the S&P 500’s 1968-1970 bear market. The stock market fell from December 1968 – July 1969. Then it bounced from July 1969 – November 1969. This bounce saw the S&P retrace more than 61.8% of its decline.

A risk-averse way to play the stock market right now

Let’s assume that you want to go long $SSO right now (the S&P 500’s 2x leveraged ETF), but you’re afraid that the stock market’s top is already in.
A good idea is to go 50% long SSO and hold 50% in cash. This is better than being 100% long $SPY (the S&P 500’s non-leveraged ETF).
If the stock market goes up, you will profit with that 50% long SSO position. Your returns will be slightly larger than being 100% long $SPY (due to SSO’s ETF compounding).
If the stock market goes down:
Wait for the S&P 500 to make a -15% decline. Then use your other 50% cash to buy $SSO when the S&P falls -15%, bringing your total position to 100% long $SSO. In other words, you average in and lower the average price of $SSO in your portfolio.
Then wait for the S&P 500 to make a 50% retracement bounce. Close your entire position at the 50% retracement. Your position will break even (i.e. no loss from the $SSO position) because your average BUY price for SSO is no longer SSO’s price at the top of the previous bull market. Your average price was much lower thanks to averaging in with your other 50% cash.

4 comments add yours

  1. Hi Troy
    (all) your models indicates to stay 100% long on SPX, since there is about one year left for this bull market. Models do not say anything about magnitude (will it be 2900? 3000? 3300?)
    I understand that for those who are afraid that market has already topped -passing to 50% long and 50% cash – could be a good strategy.
    But what is your personal vision, or, in other words how much probabilities you estimate that SPX has already topped and a bear market could start right now, or soon, without having made new ATH, and without surpassing 2872.87 made in January?

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