“Why on Earth,” a concerned reader asked recently, “would you even consider recommending buying any stock in a market you describe as bearish? After all, if the market is going to fall this year, then most stocks are going to fall with it…”
That’s a fair question. Most stocks are strongly correlated to the performance of the S&P 500. So, if the broad stock market falls in 2019 – as I’ve argued it will – then buying most stocks is going to be a mistake.
That seems logical. But, it’s simplistic thinking.
You see, even in bear markets there are lots of chances to profit by buying stocks. Back in 2008, for example, one of the best-performing strategies was to simply wait on the sidelines until the stock market reached historically oversold conditions – where the proverbial rubber band was stretched about as far as possible to the downside – and then buy stocks in anticipation of an oversold bounce.
The benefits of that strategy are obvious to anyone who had the courage to buy into the historic decline we experienced just before Christmas. The S&P has rallied 320 points off of the Christmas Eve low. That’s a 13.6% gain in less than a month.
So, it’s certainly possible to profit by buying stocks in a bear market. Granted, you’re not going to buy at the absolute bottom of a bear market decline, and you’re not going to sell at the top of a rebound rally. But capturing half, or even one-third of that 13.6% move is a fabulous short-term gain.
Traders should have several opportunities to capture similar gains as we get further into 2019.
But, the big money moves… the trades I’m most excited to make this year… involve stocks that have a specific catalyst for a move higher.
Understand… when the stock market is falling, institutional money managers are desperate to find ideas where they can put money to work. Sitting in cash is not an option for them.
Investors are paying the institutions anywhere from 0.5% to 2% to manage their money. If cash is the best alternative – and cash pays 2% right now – then why would anyone pay a management fee to someone for sitting in cash?
In a bull market, money managers have an easy job. They can pretty much buy anything, and the momentum of the bull will generate positive returns.
In a bear market, though, positive returns are tougher to come by. Money managers, in order to keep their jobs and earn large bonuses, need to do more work.
Most mutual funds don’t short stocks. So, they can’t profit on declines. They have to look for stocks with the potential to rally even when the broad stock market is bearish.
That’s where regular investors have the edge.
You see… if you can recognize the catalyst for a move higher in a stock before the institutional money managers recognize that same catalyst, then you have the opportunity to make outsized gains. Get into the stock before the institutions, and then ride the stock higher as the institutions come around to your way of thinking.
The potential gains from this type of strategy are enormous in a bear market, where institutional money managers are desperate for profitable ideas.
That’s why I’m comfortable buying certain stocks in bear markets. I know that if I can spot an idea ahead of the institutions, and I can jump in front of their buying, then it’s likely to be a profitable trade.
Best regards and good trading,
In today’s mailbag, a piece of feedback from a Mastermind subscriber…
The Mastermind sessions have already exceeded my highest expectations. The simple straight forward explanations of the various useful signals and momentum tools has been outstanding. The trade ideas and suggestions have been spot on.
I am sure option traders made even better gains. Also, a clear stance on bear vs. bull market trading mentality using the 20-month moving average. I am really enjoying the sessions, but they are already making me a better trader.
What are your personal bear market trading strategies?
And thank you, as always, for your thoughtful insights. We look forward to reading them every day. Keep them coming at [email protected].