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How to invest in a bear market

Reading time: 18 minutes

The impact of the coronavirus at the beginning of 2020 wreaked havoc on the world's financial markets. Some investors failed to learn the lessons on how to invest in a bear market from the tech-driven bubble of 2000 and the credit crunch of 2008. Knowing how to navigate these bearish market conditions is essential in protecting your portfolio and finding opportunities to grow it.

How to invest in a bear market

In this article, you will learn:

  • What is a bear market?
  • The difference between a bear vs bull market
  • How to invest in a bear market and the different financial products available to you
  • If we are in a bull or bear market in 2020
  • Strategies including sector rotation, safe-haven investing, hedging and short-selling
  • How Admiral Markets UK Ltd can help you during a bear market
  • And much, much more!

Let's get started!

What is a bear market?

At the most simplistic level, a bear market definition is that of a market which is experiencing falling prices. It is widely accepted that a bear stock market is defined as a fall of least 20% or more. This also holds true for other asset classes as well.

In the definition of a bear market, some look at a 20% fall from the asset's 52-week high. However, the US Securities and Exchange Commission define bear markets as a situation when a "broad market index falls by 20% or more over at least a two-month period".

The difference between a bear vs bull market

A bear market can be caused by any number of reasons. The Great Depression bear market of 1929 was the worst in the history of the United States with stock markets falling 90% over four years. Many analysts have called for 2020 to be the beginning of a new great depression led by the impact of the coronavirus. Two other notable bear markets were caused by the 2000 tech bubble and the 2008 credit crunch.

In a bearish market, falling prices often fuel further pessimism causing sustained declines in an asset's price. Any rallies of optimism tend to be short-lived. Most bear markets are called cyclical bear markets. A secular bear market is a bearish market condition which can last between five and 25 years. The term 'bear' is used due to the way a bear swipes downwards during an attack.

A bull market is the opposite of a bear market. It is a time when the market is going up aggressively over a period of time. The higher prices attract more and more people who also participate, fuelling further optimism and greed and pushing prices up even more. A strong economy, supportive central bank and government measures can help to fuel a bull market.

Bull markets can occur in all different types of asset classes such as stocks and shares, commodities, indices, currencies, bonds and even cryptocurrencies. When US President Donald Trump took office in 2016, one of his first acts was to cut corporation tax from 35% to 21%. This helped to fuel a bull market in stock prices. In 2020, the coronavirus helped fuel a bear market in stock prices and oil but also helped gold enter a bull market.

Did you know you can view price charts of different asset classes by downloading the MetaTrader 5 trading platform provided by Admiral Markets completely FREE? It may also be useful to download the platform now so you can follow through on some of the next examples. To start your download, simply click on the banner below:

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What to invest in a bear market

When deciding what to invest in during a bear the most important rule is to first stay calm! It is very easy to make emotional and irrational decisions. Taking a step back and understanding your bigger goals will be essential in helping you decide where to invest in a bear market.

While there are many different types of strategies to focus on during bearish market conditions, there are two types that investors would contemplate - go defensive using sector rotation and/or invest in safe-haven assets like gold. Let's look at both of these individually.

1. Bear market investing using sector rotation

The first thing to remember when investing is that cash is also a position. Preparing your portfolio for bearish market conditions may mean reducing the risk invested in the market. Quite often investors will also move risk around in what is called sector rotation making sure that they are most invested in sectors that tend to perform better during a bear market.

A sector that tends to perform well during a bear market includes the health care sector. No matter what is happening in the economy or the world, people still need medicine. This is why the health care sector and its companies tend to perform better during a bear market.

Investors have many different options to gain exposure to the health care sector. One way is to use sector ETFs (exchange-traded funds). These are assets that trade like stocks and shares and help investors gain exposure to an overall sector rather than just one company.

For example, according to the factsheet of the Health Care Select Sector SPDR Fund (XLV) it provides "precise exposure to companies in the pharmaceuticals; health care equipment and supplies; health care providers and services; biotechnology; life sciences tools and services; and health care technology industries". Below is the long-term price chart of this ETF:

Bear market sectors on MetaTrader 5

Source: Admiral Markets MetaTrader 5, #XLV, Monthly - Data range: from 1 December 1998 to 15 May 2020, accessed on 15 May 2020 at 12:18 pm GMT. - Please note: Past performance is not a reliable indicator of future results.

Another sector that tends to perform well during a bear market is the consumer staples sector. Just like with health care, in good times and bad, people still need their staple items for daily living such as personal goods and cleaning products. While investors can also use sector ETFs such as the Consumer Staples Select Sector SPDR Fund (XLP), they may choose individual consumer staple stocks such as Procter & Gamble, Costco, Walmart and others.

Below is a long-term chart of Procter & Gamble's share price:

Bear market companies on MetaTrader 5

Source: Admiral Markets MetaTrader 5, #PG, Monthly - Data range: from 1 August 2005 to 15 May 2020, accessed on 15 May 2020 at 12:32 pm GMT. - Please note: Past performance is not a reliable indicator of future results.

The long-term, monthly price chart of Procter & Gamble's share price above shows periods of sideways, upwards and downward movements. In fact, during the bull market that started with US President Donald Trump's corporation tax cuts in 2016, the company's share price did not perform well as investors chose to invest in more growth based markets.

However, investors eventually started to buy back into the market as a defensive measure when the rest of the stock market was reaching the end of its bull run. In early 2020, investors also started to buy back into the company due to the coronavirus-led bear market.

Did you know that the Admiral Markets Invest.MT5 account allows you to invest in stocks and ETFs from 15 of the largest stock exchanges in the world? Not only can you access Gold ETFs and other stocks and ETFs, but there are also other benefits such as:

  • The ability to open an account with just €1 minimum deposit and invest from just $0.01 per share with minimum transaction fees of just $1 on US stocks.
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  • Use the world-renowned MetaTrader 5 multi-asset class trading platform.

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2. Bear market investing into safe-haven assets

During times of economic crisis and uncertainty, demand for safe-haven assets tends to rise. In a bear market, investors may look to the gold market to help diversify their portfolio. There are a variety of ways investors can access the gold market. You can read more in the 'How to Start Online Gold Trading' article.

Using gold exchange-traded funds (ETFs) can help investors to balance their stock portfolios. For example, the SPDR Gold Shares ETF (GLD) which was launched in 2007 and was once the second-largest ETF in the world, can be bought and sold like a stock. The aim of the ETF is to reflect the performance of the price of gold bullion and is the largest physically-backed gold ETF in the world. You can learn more in the 'Best SPDR ETFs to Invest in' article.

Below is the long-term price chart of the SPDR Gold Shares ETF (GLD):

Gold ETF on MetaTrader 5 for a bear market

Source: Admiral Markets MetaTrader 5, #GLD, Monthly - Data range: from 1 November 2004 to 15 May 2020, accessed on 15 May 2020 at 12:38 pm GMT. - Please note: Past performance is not a reliable indicator of future results.

In the chart above, it's clear to see the long-term bullish bias of the market. While prices did fall at the beginning of the 2008 bear market, they entered a long-term bull market at the beginning of 2009 which lasted until 2011. The price regained its bullish bias from early 2018 and accelerated during the early part of the 2020 bear market.

How to trade a bear market

While investors can utilise the two investing strategies mentioned above there is also the option to use products such as 'contracts for difference' (CFDs) to trade different assets in a bear market.

This product allows investors to speculate on the price direction of an asset without ownership. In most cases, investors could also utilise leverage which means they would not need the full size of a position to open the trade as assets can be traded on using margin. The margin rate varies between asset classes and the categorisation of the client - retail or professional. There are also pros and cons to margin trading which you can learn about in the ' What is CFD Trading?' article.

1. Bear market trading using hedging strategies

When preparing for a bear market, investors may not want to exit all of the investments they have built up over time. After all if you managed to buy at a good price and it is a solid company which pays out good dividends you may want to stick with it for the long-term.

In this situation, many investors may choose to hedge their exposure by shorting a stock market index. Any potential gains on their short trade may offset any losses in their long-term stock portfolio. Of course, it is easier said than done and like with any form of trading and investing it comes with different risks. However, it is a similar style of trading often used by large multinational companies looking to offset the cost of a rising or falling currency or commodity, as well as hedge-funds.

In the MetaTrader trading platform provided by Admiral Markets, there are 16 cash indices and 24 index futures traders can speculate on. To place a sell or short trade on a stock market index you first need to open your trading platform. If you have not yet done this, you can start your free download here. Afterwards, follow these steps:

  1. Open Market Watch from the View menu at the top of the platform. Or, press Ctrl+M on your keyboard. This will open up a list of symbols to trade on.
  2. Right-click the Market Watch window and select Symbols. Or, press Ctrl+U on your keyboard.
  3. The Symbols window will then open allowing you to search for your symbol or choose from a selection of the left-side such as Cash Indices CFDs. Once you've selected a symbol or a group of symbols click Show Symbol or OK.

Viewing MetaTrader 5 symbols for a bear market

Screenshot of the MetaTrader 5 trading platform provided by Admiral Markets showing the symbols window.

To place a trade on an index your first need to open the chart by dragging the symbol in the Market Watch window onto the chart. Then you can simply right-click on the chart, select Trading and New Order. A trading ticket will open:

Viewing MetaTrader 5 trading ticket for a bear market

Screenshot of the MetaTrader 5 trading platform provided by Admiral Markets showing a trading ticket.

Did you know that you can test your trading ideas in both bull and bear markets by opening a demo trading account? This means you can trade in a virtual trading environment until you are ready to go live! You can open a FREE demo trading account with Admiral Markets by clicking on the banner below:

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2. Bear market short-selling

Another strategy available to investors is to actively short-sell stocks that are likely to perform worse in a bear market. When short selling, a trader essentially borrows the shares of a stock they do not own and then sells them in the open market. They would then look to buy back those shares at a lower price.

With CFDs, you can go long and short on a variety of different markets. In this situation, the key is to identify the cause of a bear market and find stocks that are heavily exposed to it. For example, in the coronavirus-led bear market of 2020, travel stocks were hit the hardest due to countries locking down their borders. Airlines were hit the hardest.

The Admiral Markets Contract Specification page helps you to find all the markets available to trade on. A few airlines are shown below:

Contract specification searching bear market stocks airlines

A screenshot of the Admiral Markets Contract Specification page showing a selection of airlines available to trade on.

Below is the long-term price chart of Delta Airlines (DAL):

Viewing Delta Airline stock in MetaTrader 5 for a bear market

Source: Admiral Markets MetaTrader 5, #DAL, Monthly - Data range: from 1 April 2007 to 15 May 2020, accessed on 15 May 2020 at 13:38 pm GMT. - Please note: Past performance is not a reliable indicator of future results.

The coronavirus-led bear market of 2020 turned into a market panic for most travel stocks and airlines. The move down was very fast. However, users can adjust their timeframes to capitalise on any potential fall in a stock's price.

Viewing Delta Airline stock in MetaTrader 5 for a bear market

Source: Admiral Markets MetaTrader 5, #DAL, Daily - Data range: from 26 August 2019 to 15 May 2020, accessed on 15 May 2020 at 12:38 pm GMT. - Please note: Past performance is not a reliable indicator of future results.

The daily price chart of Delta Airline's share price above shows the velocity of the fall but in more detail. This allows traders to identify market cycles and price action trading patterns to help identify potential trading opportunities. It is worthwhile pointing out that in some instances market regulators may ban short-selling temporarily to avoid any extremely large one day falls which can cause issues in the market.

Did you know that you can download an upgraded version of the MetaTrader platform by downloading the Admiral Markets MetaTrader Supreme Edition completely FREE? Not only can you access advanced, actionable technical analysis on a wide variety of financial instruments from Trading Central but you will also get access to advanced order functionality and a package of advanced trading indicators! Click on the banner below to start your FREE download!

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Are we in a bull or bear market in 2020?

In the middle of February 2020, global stock markets sold off in a market panic causing some of the largest stock market indices in the world, such as the S&P 500 Index, to fall around 36% from its all-time high price level of around 3,395 made on 20 February to a new low of 2,186 made on 23 March. This triggered a bear stock market all around the world, as the weekly chart of the S&P 500 Index shows below:

Viewing S&P 500 index on MetaTrader 5 for bear market clues

Source: Admiral Markets MetaTrader 5, #SP500, Weekly - Data range: from 13 July 2014 to 15 May 2020, accessed on 15 May 2020 at 1:37 pm GMT. - Please note: Past performance is not a reliable indicator of future results.

However, due to historic actions from central banks all around the world, including a $2.3 trillion stimulus plan from the US Federal Reserve, stock markets did claw back some of the moves lower. After the historic volatility seen in 2020, the next major move could set the trend for the long-term. Investors will be looking to see just how quickly businesses can get going again, as well as the potential for an economic recovery.

The fear of a second wave of coronavirus infections still has some investors remaining cautious. However, with the right tools, products and strategies - as highlighted in previous sections - investors are able to build diversified portfolios.

Why trade a bear market with Admiral Markets?

  • Trade with a well-established, regulated company which includes regulation from the UK's Financial Conduct Authority.
  • Benefit from a negative balance protection policy, to protect you from adverse movements in the market.
  • Access the fastest and most popular online trading platform called MetaTrader which you can use on PC, Mac, Web, Android and iOS operating systems and is provided for free by Admiral Markets UK Ltd.
  • Open an Invest.MT5 investing account to buy shares and ETFs from 15 of the largest stock exchanges in the world.
  • Open an Trade.MT4 or Trade.MT5 trading account to trade via CFDs (Contracts for Difference) in order to go long and short a market to potentially profit from rising and falling markets.

Get started today by opening a free demo trading account so you can trade in a risk-free, virtual trading environment until you are ready to go live!

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About Admiral Markets

Admiral Markets is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

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