How To Be An Expert At Spotting Bear Market Stocks


Think we are in a rising market? Well, just search for “bear market” and you will find many stocks that the gurus say are currently in bear markets. How do they do it? What do they see that we don’t?

That’s the purpose of this write-up – to provide the way that you, too, can impress others by saying, “Hey, that’s in a bear market!”

Step 1 – Get the technology

  • Hardware: A computer (sorry, your phone won’t do)
  • Internet connection: Some way to get to the web

Step 2 – Identify the data collection and management service provider

  • My preferred choice is Financial Visualizations (FinViz.com) that has all exchange listed stock and fund data (fundamental and technical) that can be screened and sorted

Step 3 – Memorize this key “fact”

  • If the market or a stock is down 20% or more from its high, it is in a bear market

You’re ready, so let’s take a test run…

  • Fire up your computer and get onto the Internet.
  • Open FinViz.com, and click on “Screener”
  • At “Index,” click on DJIA (Dow Jones Industrial Average) – I know you knew that, but for the others…

This is what you should see:

Now for a two-step procedure to find stocks in bear markets:

  • Click on the “Technical” tab near the top out within the four-tab set: Descriptive / Fundamental / Technical / All
  • Click on 52-Week High/Low button (“Any”) and choose “20% or more below High”

Congratulations! You have found the DJIA stocks that are currently in a bear market… or not (more about that “or not” later)

  • Now click on the “Technical” tab below so that the technical indicators are shown. Here is how the report looks as of the February 7, 2020, close. (Clicking on a column title sorts by that item.)

To see how these stocks got to their sorry state, click on the “Charts” tab, then click on “Candle” for Type and “Weekly” for Timeframe. Here is the result, with the charts covering the past 52 weeks.

Great! But, wait –

We need to go back to the “or not” I mentioned

Before telling someone about the five bear market stocks, we need to discuss a serious issue: The real definition of “bear market.”

Investopedia has the “modern” definition:

“What Is a Bear Market?

“A bear market is a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. Typically, bear markets are associated with declines in an overall market or index like the S&P 500, but individual securities or commodities can be considered to be in a bear market if they experience a decline of 20% or more over a sustained period of time – typically two months or more.”

This definition reflects what we read frequently. So, what’s wrong with it? Three issues:

  1. It substitutes simplistic numerical categorization for complex qualitative insight. True understanding of a bear market requires analysis and evaluation of the “widespread pessimism and negative investor sentiment” that the terms, “bear” and “bearish,” represent.
  2. No two bear markets are the same, and that goes especially for the size of the drop. Some have been less than 20%, and others much more.
  3. The inclusion of individual securities is now widespread, and that is nonsensical and highly misleading. Look at those five DJIA stocks we found above. Sure, they are in the stock market, but they are not the market. As so often happens in the stock market, stuff happens to individual companies (think Boeing). Is the stock down because of widespread pessimism? No, it’s down because the company’s outlook has deteriorated. In other words, Realism, not emotions, caused the drop. This mis-categorization has gotten so pervasive that it caused Barron’s to issue this admonition regarding Tesla’s recent 23% drop:

Tesla Stock Is Coming Back Down. Just Don’t Call it a Bear Market.

Barrons Al Root

Try this crazy analysis on for size…

A recent Investopedia article had this to say about CSX, the railroad company (underlining is mine):

CSX Stock Above a ‘Golden Cross’ After Earnings Beat

Investopedia

“CSX stock rallied by a bull market 38% from the Dec. 26, 2018, low to the May 2, 2019, high of $80.73. CSX then declined by a bear market 20.7% to its Aug. 15, 2019, low of $63.97. The stock then rallied by a bull market 22.5% to its Jan. 29 high of $78.40.” 

What a mess! “Rallied by a bull market” and “declined by a bear market” don’t even make sense. Moreover, that 20.7% drop was a downward readjustment based on an earnings report and management comments, as described in The Wall Street Journal:

“CSX Cuts Outlook, Warning of Revenue DeclineRailroad operator cites weak shipping volumes and shutdown of major oil refinery”

Here is the CSX graph for the period, showing the general rise punctuated by the negative mid-year report. Neither optimistic bullishness nor pessimistic bearishness are contained in that stock performance.

One final point: If -20% is the magic number for a bear market, then +25% should be its opposite, bull market measure (because 20% down and 25% up are equivalent price moves – e.g., 100 to 80 = -20% and 80 to 100 = +25%. So that 22.5% rise falls short of a bull market level.

The bottom line

Using a simplistic 20% down = bear market approach is easily measured but hopelessly flawed, especially when “bear” is stripped of its emotional component and “market” includes individual securities.

So, we can ignore all the down 20% articles that purport to uncover bear market information. They are incorrect – and unhelpful (we need to know beforehand, not after the fact).

A case example of the correct approach

The fourth quarter 2018 market decline was a classic bear market. To understand its dynamics, you can read my many articles from its October beginning…

October 17 –

Beware This Stock Market’s Gift: It Could Be A Bull Trap

Forbes John S. Tobey

… to its December end…

December 23 –

Friday Was Bear Market Selling Climax – Time To Buy

Forbes John S. Tobey

December 26 –

A Letter To Stock Investors: Take Heart And Have Courage – A Stock Sunrise Is Coming

Forbes John S. Tobey

December 30 –

This Is A Perfect Bear Market – Learn From It

Forbes John S. Tobey



Source link Google News

Leave a Reply