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Bear market on the way? Here's how to trade it

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Traders work on the floor of the New York Stock Exchange.

If you're looking to battle a potential bear market, investors and historical data analysis point to bonds, gold and the dollar as the way to do it.

Markets are falling worldwide due to a plunge in oil prices and slowdown worries in China. The German and Chinese stock indexes are down double digits for the year and the U.S. market is on pace for one of its worst starts in history.

Things are looking so bad right now, that Bridgewater Associates' Ray Dalio, founder of the world's largest hedge fund, told CNBC on Wednesday the Fed's next major move will be quantitative easing not a further tightening.

Investors agree market volatility could lead to more central bank intervention, which may be bullish for gold, which is already one of the year's best performers with a more than 4 percent return.

"A global bear market for equities will likely lead to another large wave of money printing around the world, including here in the U.S. This will push investors back into gold as both a safe haven and currency alternative kicking off a new bull market for the precious metal," Jesse Felder of the Felder Report wrote in an email.

The SPDR Gold Trust (GLD) is the largest physically backed ETF that provides exposure to gold price moves.

Others believe the U.S. dollar is the safety trade, and volatility plays don't provide the best risk reward at these levels.

"Once the bear market sets in, volatility will become less of a factor so the VIX will provide less alpha as opposed to during the selloff. Cash will be king as it will provide investors the time and opportunity to do some bargain hunting. In spite of weak inflationary trends and a stronger dollar, gold is a solid place to park cash as well," independent market strategist Peter Kenny said in an email.

The S&P 500 is about 7 percent from entering a full-blown bear market. Using hedge fund analytics tool Kensho, we searched for all the times in the last 15 years when the index declined 7 percent or more in 30 trading days. We then looked at the ETFs that performed the best during those sell-offs.

Here is a selection of the more interesting performers: