Swing Trading Bear Market Survival Guide

One thing investors have to cheer about in the new year: at least 2022 is over. The bear market this past year was tough on investors’ accounts. The indexes don’t completely show the destruction in some of the former growth darlings in some portfolios. Plus, the choppiness and volatility could have easily put traders on the losing end of a trend multiple times throughout 2022.

Here is how we handled the 2022 bear market from a swing trading perspective. Our key focus was on survival.

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Reducing Exposure In A Bear Market

The path to growing long-term wealth doesn’t usually go in a straight line up. There are plenty of peaks and troughs along the way. By applying some market-timing principles, our swing trading goal is to participate more on the upside and reduce our drawdowns on the downside. Opponents of market timing argue that it’s too hard to achieve. Reducing exposure during a bear market, they contend, risks losing too much ground when the market inevitably turns.

They have a point if you are striving for perfection. But you don’t have to call the ultimate top of a bull market or bottom of a bear market to make a significant difference in your results. Especially in dropping your volatility. Consider the chart shown for the performance of our SwingTrader product vs. the S&P  500 during 2022 bear market. The line at the top shows how SwingTrader basically stayed flat throughout the year, while the bottom line shows the painful action in the S&P 500.

How did we accomplish the outperformance? To a large degree, it was due to reduced exposure as shown by the area graph at the very bottom of the chart.

The outperformance began almost immediately in 2022. Reduced exposure in January left SwingTrader up (1.2%) while the S&P 500 dropped 5.3% for the month (1).

How did we know to reduce exposure? First, one of our swing trading strategies is taking profits into strength. The next part is critical. If you aren’t finding new stocks and setups to replace your sold positions, you end up with lower exposure. It happens almost naturally.

Bear Market Rallies

What about when the market turns? The S&P 500 had a strong rally in March (2) rising 3.6% for the month. Our reduced exposure did lead to underperformance with a gain of just 1.3%. But then the same thing happened. We sold into strength and didn’t find any new setups to replace the old stocks. As a result, we ended up largely avoiding the downturn through the June lows (3).

The same pattern repeated itself in the July bear market rally as SwingTrader made highs for the year (4). Though our gains were modest, we were in a good position to make highs by not participating as much on the downside. If the trend had continued higher, more setups would have increased our exposure. Instead the S&P 500 made new lows in October (5) and we again gave up little ground to the downside.

A Tough End To The Year But Still A Win

The rally in the last quarter was tougher to play. It started with a lot of the most beaten-down stocks rising. Headlines were increasing the volatility and choppiness.

At first, we followed the market up but our reduced exposure also reduced our rise (6). But between sector rotation and headline volatility, we ended up getting shaken out of many positions quickly only to see them come right back or see other sectors take over with overnight jumps. The end result is that while the S&P 500 gained we fell modestly (7).

By the end of the year, the S&P 500 started falling too and again our reduced exposure saved us. At the finish, the S&P 500 was down 19.4% for the year while SwingTrader saw just a 0.4% drop, mostly at the end (8).

So what happens if we rally now? We’ll find more swing trading opportunities and our exposure will increase. We will most likely underperform at first while ramping up our exposure. But if the rally is sustained, we will have new merchandise that keeps our exposure higher and increases our participation. The gap of outperformance during the bear market will set us up nicely for new highs long before the S&P 500 recovers the ground lost this past year. The smaller drawdowns can pay big dividends for long-term growth of a portfolio.

More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.

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