In this article:

• All areas of market getting hit
• How close is stock market capitulation?
• Catalysts could push market further down

Did this bear market sneak up on you and take a bite out of your trading plans?

Simpler’s traders have targeted downside movement over the last several months and offered insights into how to prepare for this bear stock market.

This isn’t the last roar from this bruin, and traders need to adjust strategies to take on and take part in bearish movement.

(Check out the free video, above, for insight into trading this changing market.)

Key sectors hit by bear stock market

The S&P 500 officially dropped enough – more than 22% since January – to enter bear stock market territory.

Every key market sector – energy, staples, cryptocurrency, gold, technology – has been hit by this continued drop in the stock market.

All three major indexes – Dow, Nasdaq, S&P 500 – were hammered on Monday and the losses mounted on Tuesday with the Dow and S&P 500 down slightly and the Nasdaq finishing just above flat. All indexes are down since January – Dow, 18%, Nasdaq, 31%, S&P 500, 22%.

Across the board, market sentiment remains fearful ahead of the Federal Reserve (Fed) event Wednesday. The Fed is expected to raise interest rates by at least .50% and possibly as high as 1%.

Fear in this market is palpable as the CBOE Volatility Index (VIX) is raging higher. Upward movement is not good for the stock market. The VIX – or “fear index” – was high again Tuesday at 32.69.

Questions linger about whether the Fed interest rate decision will be a catalyst moment that sends the market even lower and how low before investors capitulate.

As the market craters it can cause capitulation. This generally means investors and traders stop resisting selling pressure and give up on hopes of recovering losses while stock prices continue to decline.  

The volatility of this bear market is leaving few places for traders to hide.

“People are looking at the amount of money they have lost over the course of the last six months and they want to get out with the option to buy back in later,” stated Danielle Shay, Vice President of Options at Simpler Trading. “It’s that kind of liquidation that is causing this volatility.”

“I think it’s the beginning signs of capitulation,” Danielle said, noting that even in a months-long downtrend, the market has not experienced flash crashes or limit-down moves.

Danielle expects that these types of sharp downturns will need to be met in a bear market for a true market low to be met.

Market reaction – across the board losses Monday – to the Consumer Price Index (CPI) may have signaled where the market is headed sooner than later. CPI data showed inflation moving slightly higher and holding at 40-year record levels.

“No one can use the excuse anymore that inflation is peaking,” Danielle stated. “CIP data showed how hot inflation is and how much it has risen over the course of the last month.”

Danielle explained how this backs the Fed into a corner – raising interest rates is needed to battle inflation, but too much higher can send the market into a downward spiral.

The market, and traders, appear on edge over the possibility of any raise in interest rates above the expected .50%. Sticking with the planned raise could spur a relief rally.

The Fed announcement is expected to be a catalyst – good or bad – going forward.

Scan for stocks during bear market

This wild market means price action moves quickly, and traders need an automated tool to track key stocks.

Stock scanners work within computer software to evaluate signals on a stock chart that follow specific targets set by the trader. Computers can track many companies around the clock and maintain a trading watchlist focused on a trader’s personalized setups and strategies.

This helps traders quickly disregard stocks they don’t want and concentrate on stocks with potential.

More catalysts expected to hit market

Traders don’t have control over catalysts – sudden events or news that affect the market – including the announcement of the Fed decision expected on Wednesday.

“The best thing to do is get your watchlist ready, get prepared, and have a list of tickers that you want to look at both to the upside and to the downside,” said Danielle.

What other catalysts are on the horizon?

• SPX rollover – The S&P 500 (SPX) drop likely continues as “big money” – institutional investors start selling and rolling into quarterly expiration contracts further out. This process has contributed to big moves to the downside.
• Triple witching – Once each quarter, contract expirations hit the same day for stock options, index options, and index futures – triple witching. All this creates volume and volatility as options expire and premiums are affected.
• S&P 500 rebalancing – Heading into a new quarter, big funds and firms need to rebalance portfolios and stay within rules regarding the number of stocks held and in which sectors. This can create swings in the market.

An ongoing catalyst is the status of Apple (AAPL.)

Simpler’s traders have held Apple as a canary in the coal mine for this bear market. If Apple falls, the broader market may get hit harder. Apple is a leader in the technology space and a high-value stock within the Dow, Nasdaq, and S&P 500.

Apple bucked the bear market and posted a .88% gain today and closed at: $132.76. Apple grew from a pandemic low of $57.21 in March 2020, but is still down from $182.01 since Jan. 1.

Another market signal to watch is the inverted yield curve which happened during the Tuesday session. The inversion occurs when shorter-term bond rates exceed the rates for longer-term bond, and is a long-standing signal of an impending recession

Retail traders are encouraged to keep watching these potential catalysts to track stock market momentum and direction.

Is retail trading the best option?

This market can leave retail traders questioning whether they want to start trading or even continue trading.

Sometimes you need a little insight into trading without a long-term commitment.

If you are curious to see “how traders trade,” then come join us for FREE. Simpler Trading has opened the Simpler Free Trading Room, where traders can take a peek behind the veil to better understand what it’s like to trade with professional traders.

Sign up today and get access to our live online chat room, recorded live sessions, and free classes that might just open new doors along this trading journey.

Liquidity key data point in bear market

Finding setups in a bear market rushing further to the downside can be more risky than traders expect.

One data point to watch in trading any security is the liquidity of the asset.

What is liquidity in stock market trading? Take a look at the definition from the U.S. Securities and Exchange Commission:

“Liquidity generally refers to how easily or quickly a security can be bought or sold in a secondary market. Liquid investments can be sold readily and without paying a hefty fee to get money when it is needed.

“A stock’s liquidity generally refers to how rapidly shares of a stock can be bought or sold without substantially impacting the stock price. Stocks with low liquidity may be difficult to sell and may cause you to take a bigger loss if you cannot sell the shares when you want to.”

In a bear market, liquidity is a key factor to consider – how fast can you get into and out of a trade? Retail traders don’t want to be stuck with a security falling fast that has poor liquidity and limiting the exit strategy.

Traders can learn how liquidity works as a magnet in the market and how to use this to their advantage.

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