Ask Colin

It seems that the bull run has all but ended (early January 2001). Should I be trying to trade the bear market, or is there no alternative to waiting for a new bull market?

I think the first basic decision is whether you will trade the short side or not. If you want to do short selling, I am not the one to help you because I do not do it and therefore do not profess to have the skills required. My reasons for not selling short are to do with risk, the need to specialise and personality.

If you decide not to sell short, then you have to decide will you get out completely, partly or stay fully invested.

My approach is to reduce exposure of my trading capital to the market when the risk is high. In a bear market I will tend to be out of the market. Money market returns usually are positive in a bear market, but those in the share market are negative.

However, I would not push this view on everyone and I have a healthy respect for the view that true long term traders and investors should stay in the market. How they do this, though is important.

I do not think you just sit quietly and see your capital destroyed. At the end of a bull market some of your holdings will be over valued on fundamentals. You should only keep holding them while their uptrend is intact. If it fails, it is time to switch into something which represents better value. A defensive investor in a bear market searches out and invests in companies that are undervalued. Some of them may then report reduced earnings so that their apparent value evaporates. Usually the market signals this before the news turns up, so act on the chart. However, while a stock is good value and its chart looks OK, it can be held in a bear market.