What to Do in This Bear Market Rally

by Mike Larson
By Mike Larson

We’re in the midst of a bear market rally.

I’ve seen countless similar moves in my quarter-century career and here’s what I have to share about them:

•   They come out of the blue.

•   They can be extremely powerful.

•   They lure investors in like the Pied Piper.

•   After a short period of time, they inevitably fail.

So, what’s the smart-investor play?

Use the rally for what it’s good for … lightening up! In other words, sell any lousy stocks you’ve been lugging into the better prices the rally gives you.

Another wise move? Take advantage of the rally to rotate more money out of losing sectors and into winning ones.

A Bear in Bull’s Clothing

Before I get to that, let’s talk about why I call this a bear market rally rather than the start of a new bull run.

The biggest reason: The economic and policy backdrop hasn’t changed.

Start with the Federal Reserve. It’s still hiking interest rates … and not by a small amount. One 75-basis-point hike is already in the bag, and another 75-point move is all but certain to follow the Fed’s July 26 and 27 meeting.

At the same time, the economy is starting to weaken. Initial jobless claims have been gradually trending higher since April while housing has been slowing sharply.

Then last week, we got certifiably ugly data on manufacturing and service sector activity. A benchmark S&P manufacturing index plunged to 52.4 in June from 57 in May. That not only missed economist forecasts by a country mile, it also nearly left the index at a two-year low.

When High-Quality Stocks Don’t Lead the Way

Now let’s get into the nitty-gritty of this rally.

The stocks that posted the biggest gains recently were also the ones that are the most heavily shorted, as you can see in this chart.

Source: Charles Schwab

 

In other words, it wasn’t high-quality stocks leading the charge. It was stocks with underlying fundamentals so bad that short sellers have been circling like vultures. That’s classic bear market rally behavior.

Then there’s this ratio chart showing how the iShares Russell 2000 Value ETF (IWN) is performing relative to the iShares Russell 2000 Growth ETF (IWO).

 

When the line is rising, it’s a sign that value stocks are outperforming growth stocks. That’s been the case for over a year now, in part because the growth index is packed with all those over-owned, overloved, overvalued tech stocks I’ve been telling you to avoid like the plague.

But during this rally, the dogs had their day. The growth stocks that have been annihiliating investor capital finally rallied while value stocks took a breather. That’s another development telling me this is nothing more than a bear market rally. So, that begs the question …

What Should Investors Do?

Hop on over to the Weiss Ratings website. Use the tool at the top of the page to screen your stocks, exchange-traded funds and mutual funds.

 

If any of them sport “Sell” ratings, use this rally to dump ‘em at better prices.

Meanwhile, get out of any remaining growth stocks and put your money to work in cheaper, more cycle-appropriate value stocks.

Some sectors make a lot more sense in this weakening economy than technology, industrials or financials. For example:

•   Pharmacueticals

•   Utilities

•   Consumer staples

Another thing that makes sense? Joining my service, Safe Money Report. That service's model portfolio has been insulated from this bear market through allocations in defensive, value stocks and other recession-resistant positions.

Members are currently sitting on open gains of over 34%, 25% and 19% while icing the cake with steady dividend yields. You can join them by clicking here now.

I’ve given you the bear market rally playbook that I’ve developed in the many years I’ve been at this. And it’s a playbook that should pay off for you now and for years to come.

Until next time,

Mike Larson

About the Editor

In an era of high-risk exuberance, Mike Larson stands out as a leader in conservative investment strategies that outperform the market overall. Using the safety-oriented Weiss Ratings as a guide, he has a proven history of guiding investors to stocks and ETFs that provide asset protection, consistent dividends and excellent growth.

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