Opinion: In his latest warning, this stock market magician — who made a lot of money in bear markets and crashes — called this market a bubble like no other

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Mark D. Cook, a seasoned options trader who featured in author Jack Schwager’s bestselling book “Stock Market Wizards”, passed away at the end of October. I had planned to speak with him to discuss his bearish views on the US stock market, which was getting more and more worrying every week and shared in his twice daily market advice service.

Cook was an old school S&P 500 SPX,
-0.84%
futures trader. He made his first million dollars following the stock market crash of October 1987 filling up put options before the decline, thanks to the strength of a signal from the NYSE TICK indicator which he followed. from close.

Cook had other major stock market successes, including an audited annual return of 563% in 1992, followed by an annual return of 322% in 1993. Cook is also known to have anticipated the US stock market crashes of 2001 and 2008 (and made a small fortune betting against the market).

In recent years, he has predicted that the US bull market that started in 2009 would meet the same fate. He and I even collaborated on a book on bear markets, published in 2015. In our last conversation, Cook said that he was convinced that this current bull market was at its end of the line. He said it had gone on too long and had climbed too high.

“Think of a vacant building with a gas leak,” Cook once told me. “The gas has been leaking for a long time. The longer the gas leaks, the larger the explosion. It will take a catalyst to trigger an explosion, but no one knows what the trigger point is. The more the gas is there and ignored and forgotten, the bigger the explosion.

“The stock exchange,” he said, “is like the vacant building. When he blows, the result will be horrible. He expected the worst to hit this market.

Cook has often said his warnings were not meant to scare investors away, but rather to protect them in the event of a bear market coming in. It was also flexible enough to turn bullish after a crash, which it did successfully after 2008.

Yet by 2016, Cook had become enraged at the Federal Reserve’s bond-buying frenzy and felt that financial markets should be left alone, without central bank interference. That year, Cook was convinced that the valuation of the US market had swelled to the largest bubble in its history, and that once burst it would devastate both the US economy and the portfolios of investors.

Hints that a bear market is near

While it’s hard to predict when a bear market is approaching, there are clues. Here are some of Cook’s key signals:

1. Watch how the S&P 500 rallies: Cook paid attention when S&P 500 rallies were weak or failing. He said you can tell the strength of the market more by the way it is recovering than the way it is falling. He called them “one-day wonders,” meaning you can get a 1% or 2% rally in the S&P 500 (or more) that didn’t carry over to the next day.

Even more alarming, if a strong early rally changes direction by the end of the day, Cook sees this as an important warning sign. Typically, in a bull market, strong, healthy rallies continue not only for one day, but for several days in a row.

2. The buy-down strategy fails: Buying-the-dip works wonders in a bull market, but it fails during a bear market. When the bear buy trade was punished, Cook knew it was time to change strategy or risk getting broke.

3. Prices are always the last indicator to drop: Cook has often said that the public watches stock prices for signs of a bear market, but prices are the latest domino to fall. No one knows what causes a crash or a bear market. The catalyst usually comes from a source that no one anticipated, hitting an already weak market. The prices are dropping and everyone realizes that the market is in serious trouble. According to Cook, the clues were evident weeks or even months earlier.

Accidents are not welcome

Cook didn’t like stock market crashes because they killed volatility. He has often said that crashes are not good for anyone, especially traders. Cook thrived on volatility to make money. He preferred an occasional 10% fix to a crash. He told me he made the most money during corrections and bear markets.

It also bothered Cook that he was making money when so many investors were suffering. Short sellers such as Cook are often looked down upon and even blamed for stock market crashes. Cook has had to deal with name calling and not being asked to share his take on typically bullish financial news broadcasts.

The cook’s to-do list

Here is a list of some of the ways Cook has managed to thrive during crashes and bear markets. Keep in mind that these strategies are primarily intended for traders:

  1. Sell ​​long positions and invest in cash until the storm is over.

  2. Buy puts on the S&P 500.

  3. Buy reverse ETFs.

  4. Short individual actions.

Cook said the most prudent strategy for many traders is to invest in cash or sell stocks at a point where they feel comfortable. The switch to cash is not designed to make a profit but to protect your portfolio and also to be ready to take advantage of future investment opportunities.

Cook said you need to know how much pain you can take (that is, risk tolerance). If you can handle a 30% or 40% slowdown, then stay the course. Otherwise, switch to the key.

Another key to surviving bear markets and crashes is diversification. If your portfolio is diversified, there is no reason to panic, which many people do when the market drops 20% or more.

Cook left other valuable nuggets of business wisdom: “One thing that needs to be emphasized,” he wrote, “is that bear markets are not bad. Think of corrections and bear markets as bad. trading opportunities. There is a pause in buying, then an all-out race to the hills when the grizzly bear is on their heels. When a bear market comes, people sink into irrational thoughts and actions. always come.”

He added, “Take the opportunity to learn more about the bear markets. You should also prepare for the next bull market that will emerge after the bear market is over. This is when you can really do well. Although short trading involves good timing skills and experience, it is easier to trade in a rising market.

Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks”. His next book, “How to Profit From the Stock Market” (McGraw-Hill), features an in-depth interview with Mark D. Cook.

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