There’s something satisfying about watching a column of dominoes topple each other … except when those dominoes are toppling the stock market.
I’ve been highlighting the dominoes that would fall should a bear market be underway.
Right here in Big Picture, Big Profits, I showed you the key stock market sectors to follow, and how to use the charts to spot more stock market pain.
I told you how to know whether this stock market plunge was a typical correction or the start of something more sinister.
And just last week, I discussed how the Federal Reserve wouldn’t heed the stock market’s cry for uncle until financial conditions got worse.
Well, one by one the dominoes have fallen.
After plunging nearly 20% since the start of the year, does that mean we’re on the cusp of the next 20% down leg?
Actually, I see quite the opposite…
Has the Downturn Gone Too Far?
When I look at the homepage of any financial website, it sure does seem like things are stacked against the stock market.
But here’s the thing: Powerful rallies can emerge that drive stocks higher … and fast.
In fact, some of the biggest rallies in history have occurred right in the middle of bear markets. Just look back to March of this year, when the S&P 500 tacked on 11% in just two weeks.
And right now, I believe we have the conditions in place to see another powerful rally unfold. Just consider that:
Markets are flooded with fear. Investor sentiment has been pushed to its worst levels in years. Extreme amounts of pessimism and fear among investors can mark key turning points. Like Warren Buffet said: “Be greedy when others are fearful…”
Stocks are incredibly oversold. The 200-day moving average is a closely followed measure of long-term support. And right now, the number of stocks across the market trading beneath this measure hit 80% last week. You have to go back to the depths of 2020’s bear market to find a higher figure.
Institutions are making an appearance. The S&P 500 ended last week with a 2.4% gain. But what impressed me the most is that there were more than seven stocks moving higher for each stock that moved lower. That’s a high figure which tells me that institutions are putting money to work.
Here’s how to leverage the power of these rallies … even if they take place in a bear market.
Don’t Bet on the Bounce, Stick With the Winners
This is the kind of market where it pays to be tactical and flexible … and to have a process to play both the stock market’s upside and downside.
When it comes to tapping into short-term rallies, I don’t try to time the bottom in beaten-up stocks. My key is to find stocks that have held up well in the sell-off … where relative strength has the stock poised to break out to new highs.
Think about that for a moment. In a market that has seen the S&P 500 plunge 20%, there are still stocks hovering near all-time highs … meaning investors are reluctant to sell for any number of reasons.
They’re tough to find right now, but they’re out there! And those are your best bets for tapping into powerful bear market rallies.
Research Analyst, The Bauman Letter