The last slide in the stock market and recession fears makes us speculate if we are facing a bear market. In this post, we’ll review the current bearish sentiment and what can we do in a bear market.
The fear of recession
The pessimist sentiment aided by the lowest level of the inverted yield curve, produce a well-founded fear of recession. The following chart corresponds to the inverted yield curve compared with the S&P 500 index (SPX). The inverted yield curve is the difference between the yields of US 10-year and 2-year bonds. The negative difference indicates that the short-term bond yield is higher than the yield of the long-term bond. In summary, the inverted yield curve suggests if a recession is looming or not.
The bear market notion
In technical words, a bear market occurs if the price of a market plunges more than 20% from the recent high. From the SPX daily chart, we observe that the index this year has fallen 6.3% from the record high reached on July 26, 2019. This condition is not enough to affirm that we are facing a bear market. At the moment, we can only assert that the current state corresponds to a corrective movement.
An alternative to face the bear market
A strategy to trade in a bear market is to invest in inverse ETFs of the underlying market. For example, consider the financial sector ETF (XLF), that drops 9,20% from the last high reached in July 2019. We can go on the long side on the Financial Bear ETF (FAZ), that raises 18.29% from its lowest level achieved in July 2019.