As the third quarter comes to a close, stock market indexes are near their lows for the year. As many investors have suffered their deepest and longest losing streak in over a decade, the question remains how much lower can this bear market in the S&P 500 go? The answer is unsatisfying: No one knows. But here's a look at how we've fended off this bear so far with a swing trading strategy.
An Ugly Start Keeps Getting Uglier
The year started with a very quick decline and our low exposure left us just above flat on SwingTrader as the S&P 500 fell 10%. That's easy enough to sidestep. Temptations are few when the stock market is in free fall. It's the rallies that require patience.
In March a powerful rally in the S&P 500 led to increased exposure on SwingTrader topping out at just over 60%, before the bear market rally ended (1). While we participated in the bear market rally, our gain was a lot less than the S&P 500 due to our lower exposure.
Plus we took profits into strength and weren't finding much to replace our profitable stocks. As a result, when the S&P 500 put in a near-term top, our exposure was already well on its way lower (2). It's a similar tune that has pushed us out of the way of bear markets in the past, including 2020 before the Covid crash.
It's also worth noting that as strong as the rally was in March, at the end of the day the leading industry groups were dominated by energy, fertilizers and materials.
Another Bear Market Rally For S&P 500
For the bear market rally in July, the S&P 500 jumped almost 20% from its lows (3). We also made our highs for the year on SwingTrader but the gap of our outperformance narrowed. Here again our low exposure that saved us from much of the pain, dampened our participation in the rally. But it's a sacrifice that we've been willing to make this year.
A large part of the issue that limited our exposure was the quality and quantity of the setups. Most of the stocks that drove the early gains from the bear market lows came from the most beaten-down areas. It's hard to get excited about a 50% move in Shopify when it still leaves the stock 75% off its high.
It was also hard to find stocks holding their trends as sector rotation was rampant.
That was also the case in the short bear market rally after Labor Day (4). Stocks didn't trend for more than four days before running out of steam. And volume was suspiciously absent on the upside, especially compared to the downside just before Labor Day.
Most recently, we continue to stay out of harm's way during the bear market in the S&P 500. For most of September, we've been content to have zero exposure (5). With our outperformance gap at its largest level of the year, we can afford to try some exposure at expected bounces, usually market exposure is where we lean. But so far the market's message has been clear: stay away. In that regard, our flat performance is much better than the downward slope of the S&P 500.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
