top of page
  • Writer's pictureAlpesh Patel

The Goldilocks Strategy: Identifying and Responding to Every Type of Bear Market

Forget the Goldilocks economy, I want the Goldilocks stock market. There are three types of bears. 

Daddy Bear (1) - here you hold cash. 

Mommy bear (2), here you can weather the downturn, usually about 10% drop in the S&P500 and lasts about 3-4 months. You will worry it's a daddy bear, and the party is over. You will take profits and some money off the table in individual stocks which were your biggest gainers without the most solid of foundations. (eg Tesla)

Baby bear (3), lasts around 4 weeks and a 5-6% drop in the S&P500. But could be more of course in individual stocks. You will probably not take money off the table, and if you do, it may only be in companies which have given you 50%+ returns already. You'd ride it out for most of your portfolio. 

So how do you know if it is daddy, mommy or baby bear? 

1. Daddy - the momentum indicators are overbought on the monthly chart and drop below their moving averages across multiple stocks too. 

2. Mommy - the weekly indicators drop, as does monthly, but the monthly doesn't go below it's moving average.

3. Baby - the weekly indicator drops, monthly does not.

Navigating the stock market requires not just a keen sense of timing but also an understanding of the different market conditions that can impact your investment strategy. Let’s break down these conditions using the analogy of the three bears: Daddy Bear, Mommy Bear, and Baby Bear.

1. Daddy Bear Market (Severe Downturn)

In the Daddy Bear market scenario, you're holding cash because the momentum indicators are signalling a significant downturn. This is what you need to know:

  • Identifying a Daddy Bear Market:

  • The market shows overbought momentum indicators on the monthly charts, suggesting that stocks are overvalued and due for a correction.

  • These indicators then drop below their moving averages, a sign that the market trend is reversing from bullish to bearish.

  • This trend is not isolated to one or two stocks but is visible across multiple sectors and stocks.

  • Example: Imagine a scenario where stocks like Apple or Amazon have hit all-time highs but then start to show consistent declines over several months, slipping below their 20-month moving average.

  • Strategy: In this phase, holding cash or looking into safer investments like government bonds or stable value funds might be wise. The goal is to preserve capital until more bullish signals appear.

2. Mommy Bear Market (Moderate Downturn)

The Mommy Bear market is a moderate downturn where you can weather about a 10% drop in the S&P 500 over a few months. Here’s how to approach this milder bear market:

  • Identifying a Mommy Bear Market:

  • Weekly momentum indicators drop, showing a short-term decline in stock values.

  • Monthly indicators also decline but remain above their long-term moving averages, suggesting that the long-term bullish trend is still intact.

  • Example: Consider a situation where the S&P 500 declines by 10% over three months. Stocks like Tesla, which had skyrocketed, begin to drop, but not drastically enough to breach long-term support levels.

  • Strategy: This is the time to:

  • Take profits in some of your more speculative investments, especially those that have provided significant returns but lack solid fundamentals.

  • Rebalance your portfolio by reducing positions in the biggest gainers that are starting to show weakness.

3. Baby Bear Market (Mild Downturn)

The Baby Bear market is the mildest form of a downturn, usually a 5-6% drop in the S&P 500 over about four weeks. Here’s how you handle a Baby Bear:

  • Identifying a Baby Bear Market:

  • The weekly momentum indicator drops, indicating a short-term pullback.

  • The monthly indicators show no significant change, suggesting the long-term trend remains bullish.

  • Example: If the S&P 500 dips by 5% in a month due to temporary factors like geopolitical tensions or short-term economic data, but underlying trends remain strong, you’re likely in a Baby Bear market.

  • Strategy: In a Baby Bear market:

  • Hold onto most of your investments, as the downturn is often short-lived.

  • Consider taking profits only in positions that are significantly overvalued or have already given you returns of 50% or more.

  • This might be an opportunity to buy the dip in high-quality stocks that you believe have long-term growth potential.

Practical Tips for Navigating These Market Conditions

  1. Stay Informed: Regularly check financial news and analysis to stay updated on market conditions. Websites, financial blogs, and market analysts can provide insights into which bear market might be developing.

  2. Technical Analysis: Learn to use technical indicators like moving averages, RSI (Relative Strength Index), and MACD (Moving Average Convergence Divergence) to identify potential market downturns.

  3. Risk Management: Always have a risk management strategy in place. Use stop-loss orders, diversify your portfolio, and adjust your investment according to the market's phase.

  4. Patience and Perspective: Remember that markets are cyclical. By understanding whether you are in a Daddy, Mommy, or Baby Bear market, you can better manage your expectations and investment strategy.

  5. Educate Yourself: For more insights into making and keeping your money in various market conditions, consider exploring financial education resources. Here’s a great starting point for further learning.

Alpesh Patel OBE


bottom of page