Some questions have arisen with respect to the Bear Market Mutual Fund Strategy which really reflect the basics of system design and individual psychology. Let’s deal with system design first.

A key to system design is the objectives. This is emphasized over and over again in the How to Develop a Winning Trading System Home Audio Program, the How to Develop a Winning Trading System Workshop and in Trade Your Way to Financial Freedom. My goal (objective) in the bear market mutual fund strategy was to give you a simple technique which would:

1. Get you in a conservative inverse mutual fund when we went to red light mode;
   
   
2. Keep you there as long as the market continued going down (hopefully for a year or more); and
   
   
3. Do so fairly safely. Thus, when we hit red light mode and the markets start to really go down (i.e. are down over five weeks), then it’s basically time to get in and hopefully you can stay there. That's been hit. To me the picture couldn't be much clearer.

Once the market starts down, it really doesn’t matter when you get in – any time is fine. However, every strategy needs an entry, so I gave a basic entry signal for the system that said when the market is down over 2.5% over the last week (i.e., the average weekly change is a little over 2% so that's why I picked 2.5%), open a position. BUT ENTRY IS NOT THAT IMPORTANT. I could have easily said, if the market is down over 1% on the week. The point was to get in and hopefully stay in for a year or more. You'd open a 25% position on the first 2.5% and another 25% on the second 2.5% decline. By the time the market is down over 5% in red light mode, the decline should be fairly strong.

I didn't expect that the market would trickle down efficiently (consistently but in very small amounts). Had I expected that, I would have phrased the rules a little differently. But if you understand the objective, then the key is to get in and hopefully the market will allow you to stay in. When the market trickles down 1% per week -- then after we’re down 2.5% you should get in. Why? Well, if you didn't count trickle down weeks, then you could watch the market trickle down 1% per week all year. The market would then be down 50% and you'd never be in the market to profit from the decline.

Now for the exits:

In the Market Mastery issue in which this strategy was first described. (available as a free download). I only had a few simple exits.

1. If the VIX is over 50 get out -- we've had extreme panic and you've already made a ton of money.
   
   
2. If you make over 12.5% (i.e., your $100K portfolio which is 50% invested in this strategy is up over $12,500 due to this strategy) then reduce your position in half for the rest of the year. 12.5 is a great gain for the year and more than you can normally expect from the market.
   
   
3. If the market is up 3% on the week, reduce your position by 20%. (obviously if it were up 6% you'd reduce by 40%, etc).

The rationale for this was that once the market starts going down... a 15% correction might signal a total change of direction and I don't want you to lose more than 7.5% max -- i.e., you got in a full position and the market goes up. That would probably equate to a 2-3% loss in your portfolio by getting out gradually.

Lastly, I also had a worse case stop which was a 20% trailing stop. The only way this would ever be hit is if we had a 9/11 situation and the market went down 20% on one day.

That is it for exits.

You can make up your own version of this strategy or anything else you like. However, the key point is when the big picture becomes very clear and (in my opinion it is), you'll profit by using the appropriate strategy.

Book Strategy Differs Slightly from Market Mastery.

When I wrote the strategy up for Safe Strategies for Financial Freedom, I was concerned about people putting all their money in and the market suddenly going straight up. As a result, I substituted another worst case exit. When the market is higher than it was five weeks ago, then exit this position entirely.

Some of you may want to use this exit rule and others may want to use the 20% trailing stop. What’s the difference?

If you really want to enter the market and stay in the bear market position for a long time, then use the 20% trailing stop. If we have some rallies, you may get a little scared, but chances are you’ll be in this position a long time and make some good money.

On the other hand, if you don’t want too many surprises, then use the worst case exit in the book that says get out when we pass the close five weeks ago. If you use this, you probably will be in and out of the bear market position every time we have a rally. You could take several small losses, but avoid a bigger one. The choice is up to you.

Of course, there are no guarantees. The market doesn't guarantee anything. I hope this helps everyone. Remember that Crisis also means Opportunity.