Early in September, we got our first real glimpse at how the next bear market will play out.
The S&P 500 lost about 25 points in one day. Wall Street’s favorite momentum stocks led the way lower. Amazon (AMZN) lost nearly 2%. Beyond Meat (BYND) was trimmed by $13. The Trade Desk (TTD) dropped about $30 per share.
Investors dumped their growth stocks faster than the Patriots dumped Antonio Brown.
And while they were selling growth, investors were buying value. The worst-performing stocks of 2019 all of a sudden started to rally.
Shares of Halliburton (HAL), which were down 30% for the year, gained 5% in one day. Macy’s (M), which had lost 40% in 2019, jumped 6%. And Teva Pharmaceutical (TEVA), which had fallen more than 60% this year, rallied more than 7%—on a day when most of the stock market was getting crushed.
A similar scenario played out one week later. The broad stock market traded sharply lower. Growth stocks suffered most of the selling. And money flowed into the “value” stocks that have underperformed all year.
That’s what the next bear market will look like. Money will flow out of the best-performing stocks of the past few years, and it’ll flow into the worst performers. It’ll be a “rotational bear market”—where growth stocks will fall and value stocks will rise.
Understand… while the major stock market indexes have enjoyed a decade-long bull market run, many individual stocks have already suffered horrendous bear markets.
Many of these “value” stocks have already exhausted the sellers—meaning that anyone looking to protect a profit or limit a loss has already sold. They’re not so vulnerable to a swipe of the bear claw—because they’ve already been beaten down.
The stocks that will suffer the most damage in the coming bear market are Wall Street’s high-flying, momentum stocks. The stocks with no earnings and trade at 10, 15, or even 20 times revenue. They’re stocks investors have been willing to buy at any price over the past year because… well… that’s been what has worked.
But when it stops working—and it will, suddenly, and sooner than most folks are probably prepared for—those momentum stocks will get crushed.
And all of that money will find its way into the old-fashioned stocks that have been around forever—ones that pay solid dividends and trade at ridiculously low price-to-earnings ratios.
Best regards and good trading,
Editor, Delta Report
P.S. This bull market is the longest one in history, even longer than the tech boom that ended with the 2000 dot-com bubble burst. But if you think it’ll last forever, you’re making the same tragic mistake as the folks who lost everything in 2000 and 2008.
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