The three Phases of the Bear Market

I have been publicly bearish on $SPDR S&P 500 ETF(SPY.US)$ since March 25th with this simple bearish thesis: the Fed's expected monetary policy tightening cycle will cause a recession, and a recessionary bear market in stocks.

The Phase 1: The Liquidity shock. Historically, as the expectations of monetary policy tightening increase, stock market initially sells off with the busting of all speculative bubbles. This is the pre-recession phase.

The Phase 2: The Recession selloff. The monetary policy tightening eventually causes the increase in unemployment and a recession. As a result, the corporate earnings decrease, which causes the Phase 2 selloff of the full bear market.

The Phase 3: The Credit shock selloff. The deep recessions, such as the 2008 recession, cause the increase in the credit spreads to high levels, followed by corporate bankruptcies, and forced selling or broad deleveraging. This is the most painful stage of the full bear market - the Lehman Brothers stage.

But, what happens in between these bear market stages? The bear market rallies! In fact, I recommended taking profits on short S&P500 positions on May 3rd, as the Liquidity risk eased. $Invesco QQQ Trust(QQQ.US)$ $S&P 500 Index(.SPX.US)$ $Nasdaq Composite Index(.IXIC.US)$ $Dow Jones Industrial Average(.DJI.US)$