Shorting stocks in a bear market makes sense in the long run, and I do not let these sharp corrections bother me too much. Conversely, going long in a bull market makes sense, despite there being periodic corrections as well.
In fact, corrections in a bull market have the potential to be more severe that corrections in a bear market. There have been numerous instances were stocks have fallen by 10% or more in a day, but rarely will a market rise 10% or more in one day. Yet, paradoxically, shorting is still widely regarded as being more risky.
I am sure the question on a lot of people’s mind is whether this rally was just a dead cat bounce, or the start of something much larger. Personally, I have no idea. My philosophy is to not predict what the market will do; I only react to what does eventually unfold.
I did not cover any of my shorts today. I try not to let one day’s market activity distract me from viewing the long term picture. For example, compare these 2 monthly charts of the S&P 500:
One day before the correction (March 9th):
After the correction (March 10th):
As you can see, the big picture (the bear market) has not changed. I believe that at this point there is no justification to make any significant modifications to my portfolio. However, if the market continues to rally, I will slowly and gradually rotate out of some of my short position, and into long positions. If the big picture changes, then so will my portfolio.
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