be_ixf;ym_202212 d_06; ct_50

Select Page

The 3% of Stocks That Rise in Bear Markets

The 3% of Stocks That Rise in Bear Markets

For most of my career, I’ve been bullish. And I’ve had good reason to be.

I started trading just as the bear market was ending in 2009. For the next 13 years, I enjoyed a bull market.

But then there was that one-month bear market in 2020 — which happened to blow up one of my favorite bull market strategies. And now, a second one just two years later.

Today is the last day of the “average” bear market length — 289 days from the start on January 3.

I don’t know when the current bear market will end. But with a recession on the horizon, I think we should all get accustomed to thinking like a bear for a bit longer than 289 days.

So lately, I’ve spent a lot of time studying previous bear markets and learning what made money during them.

I learned a lot. One lesson is obvious — bear markets are brutal. Almost every stock declines as the broad market sells off. The key word being “almost.”

A very small number of stocks do deliver gains in a bear market. Today’s True Options Masters is all about finding those stocks, and figuring out if now’s the time to buy them.

The Stocks That Rose During Pandemic Panic

Let’s start with the 2020 bear market. That was the shortest bear market in history.

As traders panicked over COVID, 96.6% of the stocks in the S&P 500 Index fell. The ones that rose were what I like to call “story stocks.”

The prevailing story at the time was the pandemic. So, stocks perceived to do well in times of a global pandemic attracted investment, regardless of what shape the business was in.

There were the vaccine makers — Moderna, Gilead Sciences, and Regeneron. There were the cook-at-home stocks — Kroger, Walmart, Campbell Soup, Kellogg Company, General Mills, and Hormel Foods.

There was also Clorox — since everyone was wiping down their groceries and Amazon packages. And Digital Realty Trust, which housed the data centers that would power our stay-at-home, always-online lives.

I like stories. But they’re hard to keep up with. Because stories change fast… and if you aren’t closely following the story behind a stock, its popularity could fade faster than you can sell.

That doesn’t mean we can’t trade story stocks. And my system happens to work well on them.

Kroger is a good example. Let’s look at the chart from back in 2020.

Turn Your Images On

(Click here to view larger image.)

The grey bar in the chart below shows the one-month bear market. The blue lines are the buy and sell signals from my volatility indicator.

The trade gained 12%. Not much. But it’s hard to get mad about 12% gains during the 2020 pandemic crash.

In the previous bear market from 2007 to 2009, we saw a similar pattern. 96% of stocks fell. The winners are a small and varied group:

Turn Your Images On

There are a few repeats from the 2020 bear — Walmart, Gilead Sciences, General Mills, and Kroger. But despite their gains, they didn’t go straight up.

Walmart illustrates the pattern. After initially running up as most stocks were falling throughout 2008, the stock fell more than 20% in the last weeks of the bear market.

Turn Your Images On

(Click here to view larger image.)

So, in the last bear market, stocks went up because of stories. In the one before that, they went up, but not without also experiencing a bunch of volatility.

In other words, there’s really no easy correlation to help determine which stocks go up in bear markets.

At least, not when you’re just looking at the type of business behind the stock.

Trade the Chart, Not the Stock

Technical analysts and chart readers get a lot of hate. I don’t understand it.

Charts are just a picture of how investors feel about a stock on any given time frame. That tells you much more than any earnings report.

I think the best strategy for a bear market is to simply trade good charts. That is, stocks with charts that are in clear uptrends.

To trade good stocks, focus on the short term. Look at stocks individually — and I mean the stock chart, not the stock. If the price trend on the chart is up, it’s a good stock.

Here’s an example of a stock in an uptrend…

Turn Your Images On

(Click here to view larger image.)

As you can see, Global Life Inc. (GL) has been in an uptrend over the past few months. My volatility indicator (dark red line located at the bottom of the chart) confirms this uptrend since its crossover of the indicator’s moving average (blue line) in July.

Stocks in uptrends tend to keep delivering gains and stay in those uptrends. But don’t expect it to stay that way forever. If the trend turns down, it’s a bad stock. Sell it.

There are lots of ways to determine these uptrends. Moving averages are one popular method. Mike Carr likes his Greed Gauge. Andrew Keene looks for unusual options activity. I prefer my volatility indicator.

We all have our bear market plans. You need to create yours now. We may have just crossed over the “average” bear market length, but I don’t think we’ve seen the end yet.

Regards,

Amber HestlaSenior Analyst, True Options Masters

Share This