Tim Truebenbach On How To Make Money In A Bear Market

Brice Wightman: Good afternoon and welcome to TraderTalk. Today we are pleased to have with us a gentleman who uses fundamentals, technicals and pattern models to achieve excellent results in his hedge fund, True Capital Partners, LLC. We also have a long-time TMer to interview our special guest. It's my pleasure to introduce Eddie Kwong, and our special guest, Tim Truebenbach.

Eddie Kwong: Hi, Tim, how are you doing?

Tim Truebenbach: Fine, thank you. It's great to be here again.

Eddie: So, what do you do think about the current markets? I know you were beginning to be a little bullish last week.

Tim: In the beginning of August I became bullish as the market offered solid evidence to the point, but after Monday's distribution, where the market fell on heavier volume than Friday, I believe that we are headed lower over the intermediate-term until the market indicates otherwise.

Eddie: Still, we haven't broken lows. Is there anything that could happen that would prop us up, or do you think the probability is that we're headed lower no matter what? I know you're not into predictions...

Tim: I'm only speaking based on what I have already seen from the market. We could definitely find support at the July lows and continue with the rally. We would also see any support marked by accumulation by institutions...which would be the opposite of what we have already seen over the past several weeks. Any new evidence of accumulation would change my thinking. It would also help to see growth stocks push higher alongside that.

Eddie: Thanks. Okay, let me ask you some basic questions. Last week one of the things that came out of a conversation you and I had was that you actually have been identifying some good trades and that there have been opportunities during this bear market. Let's start from square one and then we'll get to what the opportunities are. My first question is: How do you identify when a bear market is beginning?

Tim: I look for and count distribution days in the general market indices...or days where an index closes lower on heavier volume than the previous day.

Eddie: Doesn't that just tell you that the market is in danger of dropping? But how do you make the distinction between just a drop or correction and a full-fledged bear market?

Tim: They both begin the same way...one major difference in the two takes me to the next step: to look toward leading stocks and sectors and see how they are acting. Right now they have been unable to advance, thus signaling trouble, whereas in a correction, they hold firm and support kicks in indicating that institutions are still buying leaders.

Eddie: Using this approach, are you able to gauge the strength of a downturn? For example, the distribution you saw Monday, was it indicative a major plunge, or just a pullback?

Tim: This is very hard to tell until it gets going. I would say that leading stocks' behavior is more representative of this. But it is still very hard, if not impossible, to consistently predict a decline's severity.

Eddie: I see. Now here's what everybody wants to know. How can you tell if a bounce during a bear market is nothing more than bear market rally vs. something BIGGER, like a new bull market? Is there a way for me to look really good next time I'm on CNBC?

Tim: The market is very good at setting up to fool the most investors it can. There are certain indications I look at when a new rally begins, but nothing can be set in stone. For example, the more factors that are present lead to a better bounce, such as growth stocks setting up to break out and provide leadership, high volatility, mass bearishness, etc., but again, all of this was present after 9/11 and that rally turned out to only equate to a bounce. It's better to let the market be the guide rather than predict what will happen.

Eddie: I see. And I agree that it's not a good idea to try to predict stuff. Now explain how to apply all this to trading. How would you treat a bear market bounce? Are you trading it? Are still on the sidelines? Are you using it as a setup to put on shorts?

Tim: I look at all rallies the same and treat them as such. Once ample evidence has come in that a new rally of some sort has begun, I will look to take positions in stocks that show strong fundamentals and technicals. The only difference is I will look to lock in some solid profits right in the beginning, and then worry about getting in on a bigger move if it is there to occur. This allows me to take advantage of bear market bounces and position myself correctly for the beginning of a new bull market.

Eddie: I think that might come as a surprise to some people who think you've been on the sidelines for the past two years. Given that there have been some nice rallies in the recent past, you've had the opportunity to put on some longs I take it...any memorable ones come to mind?

Tim: Taking advantage of a bounce, or looking to short the market when things turn ugly, are simply ways I can enhance the portfolio's returns from just a simple money market. Throughout the past two years, despite taking small positions, I have never been over 15% invested, and with 85% of my capital in cash, I am considered on the sidelines, but still able to reap some rewards when the odds are in my favor. Of course, more aggressive investors may choose to utilize larger positions.

Eddie: I know that some people may be curious as to your attitude about shorting. Isn't that where most of the money is made during a bear market?

Tim: I have also heard that shorting is where the money is made, and I have yet to see people cleaning up on the short side vs. those getting killed in short squeezes, etc., trying it. I do believe shorting can work, but it is a whole different animal than buying stocks and to produce solid profits requires a very conservative approach for most investors.

Eddie: Still, even as it may be a strategy that you do not emphasize as you are managing a hedge fund, how do you identify a setup that you believe makes a good shorting candidate? I know that you have picked these successfully in your service and are planning to add a feature to it along these lines.

Tim: I like to keep shorting very simple because from my experience, a lot can go wrong very quickly. I look more toward the general market and lagging sectors to short rather than individual stocks because it is much easier to see institutions looking to get out of the general market, as well as the moves are much slower. It is much harder to "run in the shorts" for the S&P 500 than some stock that only trades 500,000 shares a day.

Eddie: I'm glad you brought the subject of trading sectors up. How do you incorporate ETFs into your trading? What are the advantages?

Tim: ETFs allow me to take shorting (and buying) one step further than a general index. I am able to hone in on a lagging sector as a bear market begins and put out shorts on it. This will perform much better than an overall index and they are still relatively easy to identify as to their strength. Simply scanning the sectors last week, it was evident that semis were very weak and if we received my final tally of distribution, we could short the SMHs. They are one of the worst performing groups and a good short.

Questions From TraderTalk Workshop Attendees

Eddie: I'm going to throw you a couple questions that people in the audience have. What type of indicators and charting (candles, line charts, etc.) do you use in your trading?

Tim: I use bar charts and many of the sentiment indicators such as VIX, Put/Call, etc. Although the most important is price and volume. You may want to check out the course or take a free trial to the service as it frequently mentions the indicators I am watching.

Eddie: Knowing that we are in a bear market or bear market rally, what compels you to purchase a stock during this tough market environment? We often see these stocks fall with the weight of the market during this time, so why even attempt to buy?

Tim: There are often short-term profits to be had, and I don't let my opinion get in the way of my trading. For example, all bull markets begin the same way, a rally and a confirmation about a week later. Yet this doesn't always lead us into a bull market. I also adjust my rules accordingly, one cannot run before they learn to walk, so I will take small profits before I look to make a large profit, and even bear market rallies allow me to do this.

Eddie: Do you interpret accumulation/distribution days the same during this period of low volume? And are there any other volume clues to look for when volume has been way below average?

Eddie: You mention being long occasionally in the last couple years, which is a surprise for us who have been 100% sidelined. You say you'll take a trade and then look to take quick profits on part of it. This sounds a lot like a swing trade. Are you reducing your time frame due to the environment?

Tim: I have only amended my rules so that I can take advantage of these short tradable rallies without sacrificing a shot at larger gains when a new bull market does unfold.

Eddie: Taking shorts is very non-O'Neil as well, and surprising. Is your time frame reduced here as well?

Tim: O'Neil has always preached that shorting is extremely tricky, but he has in fact made money from time to time in it. Korvette in the '60s was such an example, and he even wrote a pamphlet on it in the late '70s. The main point I make, and I think he basically says the same thing, is that shorting is very tricky as well as not nearly as productive as going long in a bull market while being sure your capital is intact.

Eddie: I like how you use ETFs to be conservative. Is there a minimum volume amount that you demand? Some of them can have puny liquidity.

Tim: I would stay away from illiquid items, especially in shorting since they are very easy to squeeze. Q's and SMHs both trade millions of shares and were the two best candidates to short lately.

Eddie: Another question: Do you expect us to retest the July lows in September or October.

Tim: Technically speaking, yes. We are headed lower based on the recent action and those lows will provide us with the next level of support. Of course, new evidence from the market could force me to change my mind.

Eddie: So just watch it from day to day?

Tim: Absolutely, and week to week. It would take four days including tomorrow's trading to change my thoughts.

Eddie: Tim, looks like we're about out of time. As always, it has been a lot of fun.

Tim: It was a pleasure spending my time sharing my thoughts and chatting about the market.

Eddie: Tell you what, if the market does do a big turnaround to the upside in the next couple of days, I'll set you up for another TraderTalk. Then you can update us.

Tim: Sounds Good!

Eddie: Later!