[[Start here]] → [[What works in stocks?|what works]] → [[maintain your discipline|discipline]] → [[when to sell]] → market trend filter --- ![[trend-filter-bear.png]] Using a market trend filter can reduce your exposure early in bear markets. Missing the worst of bear markets reduces your capital loss, drawdowns, and downside volatility. It also saves you from extreme emotional pain! How does it work? Essentially, if the index is above its 200 (or similar) day moving average, you go fully invested, if it's below you start selling stocks. This doesn't mean selling everything (as the whipsaws will kill you) - it means, letting sell rules edge you out of individual positions. Here are three examples from various sources: Andreas Clenow[^1] describes an S&P 500 trend system that is fully invested in stocks when the index is above the 200 day moving average, but does not add new positions when below. The sell rules on stocks (stop losses and rank rules) naturally raise cash during bearish periods. He found that using the trend filter added 3.2% annually to returns and more than halved the maximum drawdown. > When the overall market index is moving down, almost all stocks follow it. Kirkpatrick[^2] proposed a 3 tiered approach to being partially or fully invested in [[cheap stocks beat expensive stocks|cheap]] and [[strong stocks beat weak stocks|strong]] stocks, by monitoring the 12 week, 26 week and 52 week average value of the model strategy. (Take the inverse approach for reinvesting) 1. If the model drops below its 12 week average - sell 25% of your holdings. 2. If the model drops below its 26 week average - sell 50% of your holdings. 3. If the model drops below its 52 week average - sell 100% of your holdings. Meb Faber[^3] describes buying the S&P 500 when it's above its 10 month moving average, selling when below. Better returns and lower drawdowns as below.![[faber.png]] While these approaches aren’t for everyone, and obviously trigger additional cost, the risk-adjusted returns improve over the long term. Drawdowns are less steep when bear markets occur, and this approach can minimise exposure. Of course, to the flip side a market-timing approach will mean you are late to any bear market rallies. [^1]: [[Clenow - Stocks on the Move]] [^2]: [[Kirkpatrick - Beat the Market]] [^3]: [[Faber - A Quantitative Approach to Tactical Asset Allocation]]