There is a great deal of "hype" regarding aggressive market timing, with timing services often advertising overinflated gains attained by trading both bullish (long) positions and bearish (short) positions.

The truth is that market timers "can" make excellent gains trading both sides of the market. But what no one tells you is that it takes more discipline and patience than most timers are willing or able to give.

Read on for the "truth behind the hype."

Natural Upward Bias

There is a natural upward bias in the stock market. That bias results in long periods of gains, during which there are many short but sharp corrections to the upward trend. These corrections often do not last long and are "usually" impossible to profit from.

Often such corrections see most of their losses within the first few days. In fact, the markets can go for months without a tradable decline. Declines must be long enough and deep enough for market timers, especially mutual fund market timers, to take advantage of them. Seldom do the financial markets oblige.

The fact is; using bearish (bear fund) positions during upward trending markets would often results in losses in those trades.

For this reason, Fibtimer typically moves to a cash position when the markets are near their highs. Cash protects against further declines, and does not lose money when the markets reverse back to the upside, as they so often do.

If the upward trend is still intact, the markets will reverse back up just as sharply. Often the resulting buying pressure causes traders to quickly exit short positions causing fast reversal rallies.

It is hard on the emotions when these quick trades occur. But aggressive timers who take both bullish and bearish trades are better safeguarded by being in cash if the markets correct from their highs.

Only when the stock market is in a long term decline or a bear market does Fibtimer enter bear fund positions. In such conditions, bear fund positions can create substantial profits.

Time Frame

Aggressive timers with a realistic time frame (several years or more) will certainly see a correction that will be long enough and deep enough to create substantial gains by taking bearish positions.

If you want to use bear funds, you must have a long term horizon, and be willing to wait for those big declines (bear markets). This is just the reality of trading.

Bearish positions are riskier than bullish positions because the markets trend higher for longer periods of time than they decline.

We only use them when we are in a bear market.

Of course years 2000 through 2002 were bear market years and the Bull & Bear Timer greatly outperformed all the other strategies. The same thing occurred in 2008-2009 when we profited using bear funds.

But when will the next bear market start?

Going For the Home Run

What market timers need to know is that there can be large profits made during long term declines (bear markets). But until we have a bear market, it is better to use cash positions during sell signals to protect against loss, yet not cause additional losses if the markets reverse to the upside.

Bull and bear timers must be willing and able to stand this test of time.

Market timers who trade both bullish and bearish positions should "expect" that they will need to trade for several years before using bear funds. It is not safe to use those funds near market highs. The risk of losses is far too great.

Those who trade bearish positions are going for the "home run." But you must recognize that home runs are not hit every day. You may go a couple of years between them, or even longer.

If you feel you cannot stay the course for such a time frame, use bullish only timing strategies like out S&P Conservative Timer, which goes to cash during sell signals.

Conclusion

Don't be swept off your feet by hype and advertising. Bull and bear strategies work, but timers who trade them must be prepared to stay with them for long periods of time.

At FibTimer, even though we have been market timing since 1982 (online since 1996), our preference is to take bullish positions. We trade our own accounts using the Diversified Timing Portfolio which allocates only a limited amount (20% maximum) to bearish positions.

Remember that Bearish positions should only be used in very specific conditions.

Yes, bearish positions do result in large gains during bear markets such as we experienced in 2000-2002 and 2008-2009, but such declines are not everyday occurrences.