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The Problem With Being Bearish

The real problem is getting caught in a vicious bear market rally like the one we just had. From October to December of last year, the market dropped 20 percent as investors headed for the exits. But then came January and the market bounced by 15 percent in a two-week period (see chart below). If you were shorting stocks with impunity, you pretty much got your balls handed to you. CNBC called it the January effect and it’s one of the many ways the market can inflict pain on bears.

As for investors, most are torn between staying long and selling, while some will use a short hedge, such as a put option to minimize downside risk. But this requires a level of sophistication and discipline that the average investor doesn’t possess. That’s why most investment advisors recommend dollar-cost averaging. If the stock drops, you simply buy more shares. And given what just transpired, it might not be such a bad idea.

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