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How To Trade The Current Bear, And Plan For The Coming Bull

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It’s been a rough year so far.

In fact, we just ended the worst first half in more than 50 years, with the S&P falling by nearly -21%, making it the worst start since 1970.

That time was also a period of high inflation like we’re experiencing now.

Interestingly, the second half of that year saw the S&P up 27%.

Of course, that does not mean that’s how it will go for the back half of 2022. But it doesn’t mean it won’t either.

True, since 1957, negative first half performances had just as much of a chance for a negative back half performance as it did a positive one.

But that being said, it’s important to look at where we are and what could be coming down the pike.

The S&P officially entered bear market territory 3 weeks ago when it closed below the -20% threshold from its all-time high close made earlier this year.

They joined the Nasdaq, which entered bear market territory in March.

The Dow, so far, has technically avoided a bear market, but only by a couple of percentage points when the markets were at their lows.

In spite of having the strongest labor market in decades (unemployment is near a 50-year low, while there’s literally millions more jobs available than there are unemployed people to fill them), inflation, and what that means for interest rates and the economy, has been weighing on the market.

With inflation currently at 41-year highs, the fear is that the Fed will raise rates too high and too fast and send us into a recession.

That remains to be seen.

But the market has so far concluded that we will indeed see a recession.

In fact, given the steep decline, it appeared the market was pricing in a worst-case scenario (hard recession vs. a soft or shallow one). Or at least that’s what it looked like, until the market rallied sharply off its lows the other week.

That begs the question, what if the worst-case scenario doesn’t unfold?

In that case, the economy and stocks could soar. And the pullback we’ve seen could be presenting an enormous opportunity. Especially with valuations now at the lowest levels in more than two years.

Moreover, the Fed is forecasting full-year GDP to come in at 1.7% this year, and 1.7% again next year.

And St. Louis Fed President, James Bullard, in a recent interview, said he sees a “pretty good second half,” driven by “strong consumption this year.”

So the Fed is looking for growth. A far cry from the worst-case scenario that the market has been pricing in.

More . . .

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For Perspective

The average bear market decline for the S&P (going back 100+ years), is about -38%. With the S&P down by -23.6% at its worst, we got more than 61% there.

Then again, over the last 13 bear markets during that time, there’s been a fair share (5 of them) that were down ‘only’ in the mid-25ish percent range (-21.5% to -29.7%).

It should also be known that the faster a bear market begins, the shallower it tends to be.

Regardless, no bear market is fun while it’s happening.

But it’s worth noting (going back to the 1950’s), that the median returns for the market once a bear market has begun is nearly 3% one month later, more than 5% three months later, and more than 23% a year later.

And the rallies that follow after a bear market has ended are even bigger.

And given the strength of the economy going into this, it’s all the more likely that we’ll bounce back big and in record time.

Trading The Bear 

Just like stocks need to fall by -20% for a bull market to end and a bear market to begin, they also need to go up by 20% for a bear market to end and a bull market to begin.

For the S&P, it needs to close at or above 4,400.12 for a new bull market to begin.

And for the Nasdaq, it’s 12,775.32.

Set yourself an alert. When we close above those levels, the bear market will officially be over and a new bull market will have begun.

But that doesn’t mean you have to wait to start nibbling at your favorite stocks and their discount bargain prices.

Some may go lower. And some may not. But they are likely much lower now than where they were just a few months ago, or even years ago. And much closer to the bottom (if they haven’t already hit it).

That’s true for your favorite stocks. As well as plenty of new stocks that you probably haven’t even heard of yet.

This pullback will usher in lots of new and exciting opportunities in the inevitable bull market that follows.

It always does.

So now is the time to start putting your list of dream stocks together. And staying engaged so you can discover what new stocks will lead the market when it goes back up.

Riding The Bull 

The big gains that follow a bear market can be quite spectacular.

But since a large part of any bull market recovery typically comes at the very beginning, it’s imperative that you stay in the market.

The trick is to get into the right stocks.

There’s nothing wrong with raising cash by getting out of your laggards and poorest performers – stocks you know you should have gotten out of long before this pullback even happened. Or getting rid of those stocks that will have an uphill battle recovering even when this is over.

But then make sure to replace them with the strongest stocks that will be the new market leaders.

The point is, you want to be building your dream portfolio now, near the bottom.

And by the time the new bull market is underway, you’ll be all in with the strongest stocks, and beating the market.

Proven Profitable Strategies

Picking the best stocks is a lot easier when you focus on proven, profitable strategies to do it.

And by concentrating on what has proven to work in the past, you’ll have a better idea as to what your probability of success will be now and in the future.

For example, did you know that stocks with a Zacks Rank #1 Strong Buy have beaten the market in 28 of the last 34 years with an average annual return of 25% per year? That's more than 2 x the S&P with an annual win ratio of more than 82%.

That includes 3 bear markets and 4 recessions.

And did you know that stocks in the top 50% of Zacks Ranked Industries outperform those in the bottom 50% by a factor of 2 to 1? There's a reason why they say that half of a stock's price movement can be attributed to the group that it's in. Because it's true!

Those two things will give any investor a huge probability of success and put you well on your way to beating the market.

But you’re not there yet, as those two items alone will only narrow down a field of 10,000 stocks to the top 100 or so. Way too many to trade at once.

So the next step is to get that list down to the best 5-10 stocks that you can buy.

Stock Picking Secrets of the Pros

One of the best ways to begin picking better stocks is to see what the pros are doing – the pros who use these methods to select the best stocks to buy.

Whether you’re a growth investor, or a value investor, prefer fast-paced momentum stocks, or mature dividend-paying income stocks, there are certain rules the experts follow to maximize their gains.

This applies to large-caps and small-caps, biotech and high-tech, ETFs, stocks under $10, stocks about to surprise, even options, and everything in between.

Regardless of which one fits your personal style of trade, just be sure you’re following proven profitable methods that work, from experts who have demonstrated their ability to beat the market.

The best part about these strategies is that all of the hard work is done for you. There’s no guesswork involved. Just follow the experts and start getting into better stocks on your very next trade.

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Stock #2: Our agribusiness pick is already riding surging food prices. With war causing food shortages, it earned billions more in net sales last quarter. And that looks to be only the beginning for this consistent EPS estimate beater.

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Thanks and good trading,

Kevin

Kevin Matras serves as Executive Vice President of Zacks.com and is responsible for all of its leading products for individual investors. He invites you to download Zacks’ newly released Ultimate Four Special Report.

¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position.