Opinion: In his latest warning, this stock trading wizard — who made huge profits in bear markets and crashed — described this market as a bubble like no other.

Mark de Kock, a veteran options trader featured in the bestselling book by author Jack Schwager stock market wizards Book died in late October. I had planned to speak with him to discuss his negative views of the US stock market, which grew more precarious each week, and participated in his twice-daily market advisory service.

Cook was one of the founders of the old S&P 500
SPX

Futures trader. He made his first million dollars in the aftermath of the October 1987 stock market crash by loading up on put options before the downturn, thanks to the strength of the signal from the NYSE TICK index that followed closely behind.

Cook had other big successes in stock trading, including a 563% audited annual return in 1992, followed by a 322% annual return in 1993. Cook is also famous for predicting the US stock market crashes in 2001 and 2008 (and making a small fortune against the market). ).

In recent years, he has predicted that the US bull market that began in 2009 will meet the same fate. He and I collaborated on a book on bear markets, published in 2015. In our last conversation, Cook said he was convinced that the current bull market was in its final stages. He said it lasted a long time and rose very high.

“Think of a vacant building that has a gas leak,” Cook once told me. Gas has been leaking for a long time. The more gas leakage, the greater the explosion. It would take a trigger to make an explosion, but no one knows what the trigger point is. The longer the gas is there and ignored and forgotten, the bigger the explosion.

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

Cook often said his warnings were not intended to scare investors, but rather to help protect them when a bear market hits. It was also resilient enough to turn bullish after the crash, which it successfully did after 2008.

However, by 2016, Cook became enraged by the Fed’s bond-buying spree and felt that financial markets should be left alone, without the intervention of the central bank. By this year, Cook was convinced that the US market’s valuation had inflated into its largest bubble ever – and when it pops, it will destroy both the US economy and investors’ portfolios.

Evidence of an approaching bear market

Although it is difficult to predict when a bear market will approach, there is evidence. Here are some of Cook’s key mentions:

1. Watch How the S&P 500 Index RiseCook: Watch out when the S&P 500 gains weak or fails. He said you can tell a market’s strength more by the way it’s going up than by the way it’s falling. Call it “one-day wonders,” which means you might get a 1% or 2% rise in the S&P 500 (or more) that doesn’t carry over to the next day.

More worryingly, if the strong early rally reverses the trend by the end of the day, it is considered an important warning sign by Cook. Usually, in a bull market, strong, healthy rises last not just for one day but for several days in a row.

2. Failure of the Buy On Retreat Strategy: Buying on the dip works brilliantly in a bull market, but fails during a bear market. When the buy-and-go deal gets punished, Cook knew it was time to either switch strategies or risk getting wiped out.

3. Prices are always the last indicator to go down: Cook has often said that the public is watching stock prices for evidence of a bear market, but that prices are the last domino to fall. Nobody knows what causes the market to crash or fall. The catalyst usually comes from a source that no one expected, and it’s hitting an already weak market. Prices drop and everyone realizes that the market is in serious trouble. According to Cook, the clues were clear weeks or even months ago.

Malfunctions are not welcome

Cook did not like the market crash because it eliminated the volatility. He would often say that accidents are not good for anyone, especially merchants. Cook flourished due to the vicissitudes of making money. He preferred a flat 10% correction to a crash. He told me he made the most money during corrections and bear markets.

It also upset Cook that he made money while many investors suffered. Short sellers like Cook are often despised and even blamed for the market crash. Cook had to deal with name-naming and not being invited to share his opinions on rising financial news shows.

Cook’s To Do List

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

  1. Sell ​​long positions and move into liquidity until the storm passes.

  2. Buying puts on the S&P 500.

  3. Buy inverted ETFs.

  4. short individual stocks

Cook said that the wisest strategy for many traders is to move into cash or sell stocks to the point where they feel comfortable. Moving to cash is not designed to make a profit but to protect your portfolio and also to be prepared to take advantage of future investment opportunities.

You should know how much pain you can accept (i.e. take risks), Cook said. If you can handle an economic contraction of 30% or 40%, follow the path. If not, go to the side lines.

Diversification is another key to surviving bear markets and meltdowns. If your investment portfolio is diversified, do not panic, which is what many people do when the market loses 20% or more.

Cook left other valuable nuggets of trading wisdom: he wrote, “The only thing to stress, is that bear markets aren’t bad. Think of corrections and bear markets as trading opportunities. There is a pause in buying and then an all-out run of the hills when the grizzly is in their wake. When it arrives Bear market, people come down to irrational thinking and actions.He – she Always Happen or occur. “

He added, “Take the opportunity to learn about the bearish markets. You should also prepare for the next bull market that will appear as soon as the bear market is over. This is the time when you can do a really good job. While trading on the short side involves good timing skills and experience, it is It’s easier to trade in a bull market.”

Michael Sensere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks.” His upcoming book, How to Win in the Stock Market (McGraw-Hill), features an extensive interview with Mark D. cook.

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