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  /  News   /  Michael Sincere’s Long-Term Trader: In his final warning, this stock trading wizard — who made big money in bear markets and crashes — called this market a bubble like no other

Michael Sincere’s Long-Term Trader: In his final warning, this stock trading wizard — who made big money in bear markets and crashes — called this market a bubble like no other

Mark D. Cook, a veteran options trader who was featured in author Jack Schwager’s best-selling “Stock Market Wizards” book, passed away in late October. I had planned to speak with him to discuss his bearish views on the U.S. stock market, which grew more ominous each week and shared in his twice-daily market advisory service. 

Cook was an old-school S&P 500
SPX,
-1.18%

futures trader. He made his first million dollars in the wake of the October 1987 stock-market crash by loading up on put options before the downturn, thanks to the strength of a signal from the NYSE TICK indicator he closely followed.

Cook had other big stock-trading successes, including a 563% audited annual return in 1992, followed by a 322% annual return in 1993. Cook is also known for anticipating the 2001 and 2008 U.S. stock market crashes (and made a small fortune betting against the market).  

In recent years, he predicted that the U.S. bull market which began in 2009 would meet a similar fate. He and I even collaborated on a book about bear markets, published in 2015. In our most recent conversation, Cook said he was convinced that this current bull market was on its last legs. He said it had gone on too long and gone up too high. 

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

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

Cook often said that his warnings were not meant to scare investors, but rather to help protect them when a bear market arrives. He was also flexible enough to turn bullish after a crash, which he successfully did after 2008. 

Yet by 2016, Cook had become infuriated by the Federal Reserve’s bond-buying spree and felt that financial markets should be left alone, without central bank interference. By this year, Cook was convinced that the U.S. market’s valuation had inflated into its biggest bubble ever — and when it popped it would devastate both the U.S. economy and investors’ portfolios. 

Clues that a bear market is near

Although it’s tricky to predict when a bear market is near, 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 failed. He said you can tell the strength of the market more by the way it rallies than the way it declines. He called them “one-day wonders,” meaning you may 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 reverses direction by the end of the day, Cook saw it as an important warning sign. Typically, in a bull market, strong and healthy rallies continue not just for a day but for several consecutive days.

2. The buy-on-the-dip strategy fails: Buying-the-dip works brilliantly in a bull market, but it fails during a bear market. When the buy-the-dip trade is punished, Cook knew it was time to either switch strategies or risk getting mowed down.

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

Crashes are not welcome

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

It also bothered Cook that he made money while so many investors suffered. Short-sellers such as Cook are often despised and even blamed for market crashes. Cook had to deal with being called names and not being invited to share his views on typically bullish financial news shows.

Cook’s to-do list

Here’s a list of some of the ways Cook was able to thrive during crashes and bear markets. Keep in mind that these strategies are primarily for traders: 

Sell long positions and move into cash until the storm has passed. 

Buy puts on the S&P 500. 

Buy inverse ETFs. 

Short individual stocks. 

Cook said that the most prudent strategy for many traders is to move into cash or sell stocks to a point where they’re comfortable. Moving 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 that you must know how much pain you can accept (i.e., risk tolerance). If you can handle a 30% or 40% downturn, then stay the course. If not, move to the sidelines. 

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

Cook left other valuable nuggets of trading wisdom: “One thing that must be stressed,” he wrote, “is that bear markets are not bad. Think of corrections and bear markets as trading opportunities. There is a pause in buying and then an all-out run for the hills when the grizzly is on their heels. When a bear market arrives, people descend into irrational thinking and actions. It always happens.”

He added: “Take the opportunity to learn about downtrending markets. You should also prepare for the next bull market that will emerge once the bear market ends. That’s when you can really do well. While trading on the short side involves good timing skills and experience, it’s easier to trade in a rising market.”  

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

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