Markets

3 Steps to Prepare for the Bear

Stock performance with laptop and calculator

The vote by UK citizens to leave the European Union has sent big shock waves through global finance. But if you stop and think about it, the "Brexit" result was really just an unexpected catalyst for a stock market on dubious ground.

Stocks were already richly valued and pushing the envelope of growth expectations against the backdrop of a harsh earnings recession and a stumbling economy.

I'm not saying that a bear market is imminent. What I am saying is that you have to make a plan now to prepare for the possibility. Because it's not a question of if , but when this old bull market rolls over into a bear.

And without a strong action plan, you stand to lose 50% of your investment accounts along with the rest of the market.

Let's explore 3 steps so you can be different than the crowd...

Step 1: Spot the Warning Signs

There can be multiple causes of a bear market, but numero uno is the onset of recession. This is true because without fundamental economic momentum, there can be little earnings momentum for companies.

One key marker of past recessions has been an inverted yield curve, when short-term rates rise above the middle part of the curve from 2 to 10 years out. Some observers would even say that the Fed is the primary cause of recessions because of their control of short-term rates.

With the 10-year US Treasury yield at 1.6%, many are noticing how "flat" the curve is getting now. And that flight to safety in Treasuries is making the Fed very nervous about their plans to get interest rates back to normal.

So how do you forecast the next recession?

While the market is often a terrible predictor of this unwelcome part of the business cycle - as they say, stocks have predicted 9 of the last 4 recessions - there are some key economic data points you should monitor to give you a rough "recession probability" indicator.

I discuss these in my extended report and when they move my "indicator" to a 25% chance of recession, I am quickly scaling back stock market exposure. At a 40% chance of recession, I may even be going net short.

More . . .

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Warning: Bear Market Ahead

The average bull lasts 63 months. We are already 87 months into this one. The question is not if the bear will strike but WHEN. Are you prepared?

If not, you could lose 20%, 30%, even 50% or more of your portfolio's value. (The market dropped 58% during the last bear.)

Zacks' Bear Market Game Plan unfolds a strategy for not only surviving but actually making substantial money from a declining market. This free report is available until midnight Sunday, June 26.

Download free report now >>

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What About Valuations?

Bull markets don't die of old age or go out with a whimper. They tend to go out with a bang of euphoria as everybody and their brother are buying stocks with irrational exuberance.

The last six bull market tops saw the S&P 500's trailing 12-month [TTM] P/E ratio hit an average peak of 30 times earnings. I doubt we get that high again after the lessons learned in the two bear markets of the prior decade, but it's certainly still possible.

What I'll be watching for is a TTM P/E level of 20 and higher. For example, if the S&P earns $110 in 2016, an index level of 2100 would be only 19X. But if the index moves to 2200, and earnings growth continues to falter, that's a 20X market multiple.

This is a time to at least be on the lookout for signs of market mania where too many stocks are sporting P/Es of 25 and higher.

Step 2: Avoid Common Blunders

Even if you correctly detect the onset of The Bear, you've only just begun to prepare for a battle with him. Let me tell you where most people go wrong, making common mistakes even after they've been warned and informed. Here are the four most common blunders that you must avoid...

Hope It's Just a Correction and Continue to Go Long

Those who ignore the warning signs of The Bear are often in denial. And they are applying a fatal strategy of hope.

Freeze in Fear as 40% of Your Money Disappears

Possibly worse than the "strategy of hope" is becoming frozen in fear during those big market declines that tend to mark the start of The Bear's first few weeks. If money is tied up in high-beta growth stocks, plan on losing 50-60% of your portfolio.

Downgrade to "Defensive" Stocks and Still Lose 20%

Some investors have a plan to shift out of high-beta growth stocks and into sectors like Utilities and Consumer Staples. The trouble is, even these areas can burn your money, just at a slower pace than more aggressive stocks.

Run to Cash and Earn Virtually Nothing

Finally, a small percentage of investors have seen this movie before and they liquidate stocks and shift it to cash as their only safe choice. Obviously, playing it safe like this can preserve your wealth, but you won't get ahead.

What if you could take advantage of the folks making the first three blunders and ride The Bear to exceptional returns of +20% to +40%?

That's what the next step is all about.

Step 3: Key Actions to Make the Bear Pay YOU

Right away, once The Bear is confirmed, you want to finish the process of cashing-in the bull market winners you still hold. Of course, the dead weight and losers should already be gone because, as you probably know, the later stages of a bull market have little tolerance and few rewards for all but the most fundamentally-strong stocks.

Sure, some stocks will still rise during The Bear. But the odds of you picking the right ones are slim. No sector or industry is safe when institutions go into sell mode on recession fears.

Long story short, sell all your stocks to avoid future losses.

Get NET SHORT and Ride the Bear to 40%+ Profits

Next, the way to play The Bear is to grab inverse index and sector ETFs. This is the way to essentially make gains by whatever percent the market goes down.

Bear markets, on average, see a 34% decline in the S&P 500. So if you time this approach well, you could come out with a 30-40% gain.

Two other strategies I am ready to deploy once The Bear is confirmed are using leveraged inverse ETFs and shorting Zacks #5 Rank stocks to multiply my Bear Market profits.

What to Do Right Now

I detail all these approaches in my Special Report, Zacks' Bear Market Game Plan. I invite you to download it free today.

This report reveals specific steps you can take to spot crucial warning signs, protect yourself from massive losses that many investors will suffer and aim for big profits in the midst of a downturn.

The Bear Market Game Plan will also prepare you for the Return of the Bull. Following the plan will help you build up the cash and the confidence to potentially double or triple your money when the bull takes over again.

Please don't procrastinate. The time to prepare is now. The Bear Market Game Plan is only available for free until midnight Sunday, June 26.

Download Zacks' Bear Market Game Plan Now >>

Good Investing,

Kevin Cook

Kevin, a Senior Stock Strategist at Zacks, is a recognized authority in global markets and noted for accurately predicting and tracking market movements. He is the author of Zacks' Bear Market Game Plan.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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