Author: Ivanhoff

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That bear market bounce didn’t last long. SPY and QQQ rallied to their previous low where they found resistance. Then, they continued down and finished at new 52-week lows. The silver lining is that many stocks and ETFs did not make new 52-week lows alongside the indexes which is a bullish breadth divergence. This is not a reason to buy blindly; just a signal that selling is starting to weaken.

In a bear market, eventually, all stocks get hit. We saw a glimpse of that last week when even consumer staples like Costco went down more than 15% on weak earnings reports from competitors Walmart and Target. Everyone’s favorite Big-Tech stocks have also been under heavy pressure as they have become a source of liquidity for many – AAPL, GOOGL, MSFT, AMZN, NVDA, and TSLA are down 25-50% from their 52-week highs.

The issue with prolonged downtrends is that they can become self-fulfilling prophecies to a certain degree. Companies without a positive cash flow have to raise more money to survive which means diluting current shareholders. Younger tech companies that compete for talent with Big Tech, have to give their employees more stocks and options to keep them from leaving – which means again diluting current shareholders. In a way, lower prices bring more supply from both the companies and shareholders who want out. This is why most rips don’t last long during downtrends. There’s too much overhead supply.

The good news is that the market is cyclical and no trend lasts forever. Out of every bear market and economic situation, there is always a new set of winners that will set up and go on to make 5-100x returns. This one won’t be any different. 

In the meantime, it pays to remain nimble (focused on really short-term trades) and with a high cash position. 

Here’s how I think the three stages of a market bottom are formed:

Stage 1 – Bullish breadth divergences – the main indexes will make new 52-week lows but many stocks and ETFs won’t. This is not a reason to buy. Just a sign that selling might be getting weaker.

Stage 2 – Heavy-volume wide-spread buying – the majority of stocks and main indexes go up 5-10%+ on 3-5x their average daily volume.

Stage 3 – More and more long setups start to show up and breakouts are following through. If this does not happen, Stage 2 is likely to be just a bear market bounce and new lows are likely to follow.

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The charts in this video are powered by MarketSmith

One of the major characteristics of bear markets is very high correlations between stocks regardless of their current or expected fundamentals. We saw that last week when in the first half most stocks sold off together and in the second half they rallied – again together. 

During market corrections, some religiously look for stocks that show relative strength. The premise is simple – if a stock tries to break out to a new 52-week high while the general market is selling off, it is likely to be a future momentum leader. We have seen this time and time again. One of the most recent examples is Cloudflare (NET). Between February 20 and March 5th, 2020, NET rallied to new all-time highs. At the same time, SPY dropped 15%. At the time, I wrote that NET is likely to be a future leader. Guess what happened in the next few weeks. The market accelerated lower bringing down everything with it. In a few short weeks, NET went from a new all-time high to new all-time lows. When the market calmed down and started to climb, NET quickly made new all-time highs and it went up 10x from there.

Keep a watch list of growth stocks that hold well and even try to make new highs when the market is in a correction but keep in mind that those growth stocks are not very likely to make big sustained moves until the market starts to climb.

We are in the midst of a bear market bounce. It could last only a few days or a few weeks. Any such climb would be a climb of a wall of worry. After a few months of selling, most market participants are not thinking about buying dips blindly and are not trusting the rallies. It will take a long time for this sentiment to change which means that excessive volatility and frequent reversals are still here to stay for the time being.

Try my subscription service which includes a private Twitter feed with option and stock ideas, emails with concise market commentary and actionable swing, intraday, and position trade ideas, the Momentum 40 list of market leaders, and much more. See some of the recent testimonials.

PERFORMANCE

Here’s a Google spreadsheet tracking all closed options and stock ideas shared on my private Twitter stream and emails for subscribers.

Check out my free weekly email to get an idea of the content I share with members.

Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.

The other day I listened to an NPR story about some guy who bought 6K worth of AMZN stock in his eTrade account in the late 90s. He decided to forget about his account and check on it 20 years later like Warren Buffett teaches – buy strong companies you believe in and forget about them. When the guy checked his account 20 years later, it was empty. He called eTrade. They told him that the state of Delaware seized his account in 2008. States do that when you don’t check your account for a certain period of time (three years in many states). He called Delaware’s unclaimed property department. Turns out they sold his shares in 2008 and were holding the money for him – $8k. The guy was furious. His AMZN shares were supposed to be worth over 100k when he checked. 

The moral of the story. 

1. Check your brokerage accounts once a year.
2. Go to google and type “lost money” +” any state you have ever lived in”. Go to the unclaimed property section of that state and type your name. You might be surprised to find that you have unclaimed money from checks, bank accounts, and brokerage statements. If you find a match with your name and a recognizable address, you can file a claim to get your money back. There are billions of dollars that the States keep as unclaimed property.