Bear markets are almost universally hated. Unless you’re a permabear – but permabears don’t make money. It sounds clever being bearish but in reality, betting against the prosperity of global economies, in the long run, has been a silly move.
That said, being able to recognise when the bull market is in its euphoria stage is a good time to think about battening down the hatches.
Given that we are now deep in bear market territory, I wanted to look into some statistics. The biggest bear market on record (and the most notable in history) is often considered to be the Great Depression, which lasted from 1929 to 1932. During this period, stock prices plummeted, with the Dow Jones Industrial Average (DJIA) losing about 89 per cent of its value. This bear market lasted approximately three years. If you’re old enough to remember the fear of dotcom (I was too busy playing Pokémon Yellow on my Game Boy Colour to care about stock prices) this produced a drawdown of 49 per cent. Savage, but not quite as brutal as the Great Depression.
The global financial crisis (this time I was too busy in student bars) saw the S&P 500 index decline 57 per cent from its peak in October 2007 to its trough in March 2009.
The penultimate bear market, before this current one, lasted less than six weeks. From a peak on 19 February 2020 to a trough on 23 March 2020, the biggest drawdown was on the Dow Jones, which saw a 37 per cent downturn.
But bear markets are reasonably common. Since 1950, the S&P has seen more than 40. And this one shows no signs of abating. House prices are finally starting to fall, and interest rate rises mean more and more homeowners are seeing their disposable incomes take a hit every month. So far, consumer spending has remained relatively high, but rates were raised 50 basis points last month and are likely to increase further.
Recessions tend to hit the poor first, then the middle classes, and finally the wealthy. Everyone feels negative. Stocks gap up and get sold into and hammered back down. People race to cash in shares that could easily be worth less tomorrow because they need the cash today. Selling begets selling. Investors have been thoroughly ground down as valuations drop, so they sell more shares, and the prices continue to fall.
It pays to be nimble in this market. Being able to get in and out quickly is one of the biggest advantages of being a retail investor or trader. And there are plenty of opportunities if you keep your eyes open.
For example, last on the final day in June Aim-traded Harland & Wolff (HARL) put out an RNS around 6pm after the market closed. And whenever you see a trading update or earnings report snuck out when nobody is likely to be looking, you can guess that it’s probably not good news. And in the case of this RNS, it wasn’t. The chief financial officer wrote that the business was “undercapitalised and would need to address [the company’s] capital stack in due course”. Given that the business is heavily lossmaking and already carries plenty of debt, my view was there could well be an equity placing at some point. And almost certainly at a discount, as most placings are (Kooth (KOO) last week is a rare example of a premium placing).
My trade idea was to short Harland & Wolff on the Monday morning, as nobody would be rushing in to buy on such news, and people who are holding may look to get out fast.
Looking at the chart below, we can see the stock fell, rallied back to where it opened, then spent the rest of the day sliding down.
Finding stocks with bad news can be a profitable trade with good risk/reward. To short stocks like this, you need to use either a spread bet or a contract for difference (CFD), and ask a broker if there is enough borrow for you to take a position. It’s often best to call ahead of the opening bell, as you don’t want the borrow to be finally approved when the price has already started falling.
Another strategy you can use is to find stocks with weak balance sheets and low cash balances. You can then head to the cash flow statement and check out how much capital the company has burned through. If the company is burning through £250,000 a month on average, and only had £300,000 at the time of the results, you don’t need to be Warren Buffett to deduce that there may be a placing coming – and soon.
Shorting companies with weak balance sheets in this way is a great strategy – however, just be aware that the lower the company's market cap the higher the potential for any spike in the share price.
An example of this can be seen in Chart 2, where Fusion Antibodies (FAB)
desperately needed capital and was forced to raise at a price of 5p despite the shares being well above 30p before the raise began.
At the very least, being aware of this will help prevent you from buying car crash investments.
