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

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Mark D. Cook, a veteran options trader who was featured in best-selling author Jack Schwager “Stock Market Wizards” Book, died at the end of October. I had planned to speak with him to discuss his bearish views on the US stock market, which became more ominous every week, and shared in his twice-daily market advisory service.

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Cook was an old school S&P 500 SPX,
-1.18%
futures trader. He made his first million dollars by loading up on put options before the recession in the wake of the October 1987 stock-market crash, thanks to the strength of a signal from the NYSE TICK indicator, which he followed closely.

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

In recent years, he predicted that the US bull market that began in 2009 would face a similar fate. He and I also collaborated on a book about bear markets published in 2015. In our most recent conversation, Cook said that he was convinced that this current bull market was in its final stages. He said it went on for too long and went too high.

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“Think of an empty building that has a gas leak,” Cook once told me. “The gas has been leaking for a long time. The longer the gas, the bigger the explosion. A catalyst would be needed to trigger the explosion, but no one knows what the trigger point is. The longer the gas remains and is ignored, and forgotten, the bigger the explosion.

“The stock market,” he said, “is like an empty building.” When it blows up, the result will be terrible. He expected the worst hit in this market.

Cook often said that his warnings were not meant to scare off investors, but to help protect them when a bear market hit. He was also flexible enough to accelerate after a crash, which he had done successfully since 2008.

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

Clues that a Bear Market is Near

Although it is difficult to predict when a bear market is near, there are some clues. Here are some key cook signs:

1. See How the S&P 500 Rallies: Cook noted when the S&P 500 rallies were weak or failed. He said that you can tell the strength of the market more by the way it turns than by the way it falls. He called them “one-day miracles,” meaning you might find a 1% or 2% rally in the S&P 500 (or more) that doesn’t last until the next day.

Even more worrying, Cook saw this as an important warning sign if a strong early rally leads to a reversal of direction by the end of the day. Usually, in a bull market, strong and healthy rallies continue not only for one day but for several days in a row.

2. Dip Strategy Fails: Buy-the-dip works wonderfully in a bull market, but it fails during a bear market. When buy-the-dip trading is penalized, Cook knew it was time to switch strategies or reduce risk.

3. Prices are always the last indicator of a fallCook: Cook often used to say that the public looks to stock prices for clues to a bear market, but prices are the last dominoes to fall. No one knows what caused the crash or the bear market. The catalyst usually comes from a source no one could have imagined, hitting an already weak market. Prices fall and everyone realizes that the market is in serious trouble. According to Cook, the clues were obvious weeks or even months earlier.

accidents are not welcome

Cook did not like the downturn in the market because he brushed off volatility. He often said that accidents are not good for anyone, especially businessmen. Cook thrived on volatility to make money. He preferred the occasional 10% correction for the accident. He told me that he made the most money during corrections and bear markets.

It also bothered Cook that he made money while so many other investors suffered. Short-sellers like Cook are often despised and even blamed for market crashes. Cook had to deal with being called names and not invited to share his thoughts on a generally increasingly financial news show.

Cook’s To-Do List

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

Cook said the most prudent strategy for many traders is to move to cash or sell the stock at a point where they are comfortable. The move to cash is not designed to make a profit but to protect your portfolio and be ready to take advantage of investment opportunities in the future.

Cook said you should know how much pain you can tolerate (ie, risk tolerance). If you can handle a 30% or 40% downturn, stay tuned. If not, move to the shore.

Another key to surviving bear markets and crashes is diversification. There is nothing to panic if your portfolio is diversified, which is what many people do when the market loses 20% or more.

Cook left other valuable nuggets of business wisdom: “One thing that needs to be emphasized,” he wrote, “is that bear markets are not bad. Regarding corrections and bear markets as trading opportunities.” Think. There’s a pause in shopping and then an all-out run for the hills when the grizzly is on their heels. When a bear market hits, people get into irrational thinking and actions. This Always Happens.”

He continued: “Take this opportunity to learn about the downtrending markets. You should also be prepared for the next bull market that will emerge after the bear market is over. Only then can you really do well. While on the short side Trading involves good timing skills and experience, it is easy to trade in a growing 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.

more: These stock trading signals can tell you when the market is overbought or oversold

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