How do you plan to make money during bear markets? I have been writing recently about how the near term future has numerous head winds which should be damaging to equity prices. It seems the market has been agreeing with me over the last weeks. What are you doing to beat the market and make money when the market is getting slaughtered?

First of all, my goal is to remove any emotion from my investment decisions. Also, my goal is to be prepared to make money in any market. My goal is to participate in bull markets and preserve capital while still earning a return in bear markets. Here are a couple of my strategies that help me exploit overall market conditions.

Stock Strategy #1: Having A Stock Watch List

One way to maximize bear markets is by having a watch list. Your watch list should be a list of companies that you would like to invest in. Perhaps these companies are where you want your money to be but the current share price is a little too high. Having a watch list helps you monitor a share price and to maximize your buying opportunities. Your watch list should remain the same no matter what market conditions are because it is based on the fundamentals of the companies as opposed to stock activity. These companies may become more attractive as the market gets pummeled.

Stock Strategy #2: Betting The Market Trends

In the recent past, when I have felt the market was too high, I have taken a small position in an ultra short ETF (SDS) which goes up when the market goes down. In the early part of the year, I bought and sold SDS a few times netting a couple hundred bucks each time taking advantage of ugly market conditions. As the market heads south, selling SDS and rolling that cash into my watch list stocks that are now on sale is a nice way to beef up strong, long term positions.

Stock Strategy #3: Diversification Cannot Make Money In A Bear Market

Your diversified portfolio will follow the overall market trends. Are you diversified simply for the sake of diversification or is diversification a secondary result of your careful selection of individual stocks? The latter is acceptable, the former is not.

The Current Environment

What is your move for the remainder of 2008? Perhaps you think the Fed will hike rates and the Democrats will take control of the government and raise taxes? This could equate to more weakness for stocks. Furthermore, will earnings continue to be eroded due to slow growth and higher inflation? These factors spell ugly market conditions in my opinion.

The question is how aggressive do you want to be? Do you want to short the market through an ETF such as SDS? Or perhaps you just want to short the financial sector, check out SKF.

If shorting is too bold for you, maybe you want to simply sell portions of your positions when given the opportunity such as a short term bounce. Raising cash may help you buy stronger positions at lower prices.

My Views

I have been selling chunks of my outperforming positions such as Apple (AAPL) and Chesapeake Energy (CHK). Chesapeake has been unstoppable and I still hold a significant position, but I am always for taking profits when possible. As natural gas stocks climb higher, i get more nervous. More and more people tell me that I’m nuts for selling any of my position in Chesapeake, but I’m willing to risk future gains for the sake of taking profit as the stock continues to climb. I’m as anxious as you are to see how the natural gas run progresses in the second half of 2008.

I have been buying defensive companies such as Philip Morris Int’l (PM) and Veolia Environment (VE). VE has dropped further since I bought it, and I may add to my position. I like the dividend and long term potential of both of these stocks.

I’m absolutely staying away from financial stocks.

Questions To Ask Yourself:

• Am I in a position where I’ll be fine if the market tanks further in the second half of the year?
• What is my plan if the market gets worse?
• What is my plan if the market rebounds?
• Do I have a watch list compiled of companies that can perform in any environment?

Happy hunting!

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