A bear market can cause panic to the point where investors are literally throwing the baby out with the bathwater. bear markets always recover. The question is from which point and when. A bear market evokes fear and capitulation on the way down and regret and fear of missing out (FOMO) on the way up. While professional money managers preach the “stay tuned” mentality, the reality is that not all stocks are worth holding onto during a bear market. Many stocks will collapse and never recover. Bear markets are times to reassess which stocks are worth holding during a bear market for a period of time recovery then. It’s also a time to go shop for promising stocks that may have been overpriced during the bull market. Here’s how to determine which stocks are worth holding through a bear market. The focus is on determining which stocks will participate in the recovery after the bear market is over.
Blue Chip S&P 500 leaders and best-of-breed stocks
The S&P 500 and benchmark indices have not only recovered, but surpassed previous highs of every bear market. However, keep in mind that the benchmark indices are always adjusted to kick out the losing stocks and add winning stocks. So don’t assume that your stocks will all recover based on the benchmark indices. The best of breed stocks in the S&P 500 index are most likely to lead the recovery. Always look for quality stocks with strong balance sheets, relevant trends, industry leadership and liquidity.
A bear market can be unforgiving and panic can cause stocks to crash below their intrinsic value level. The most basic rating is the cash per share (CPS). Shares trading at or below the CPS levels may be considered value games. If a stock trades below its CPS, the company is technically free. Keep in mind that there could also be fundamental reasons for the weak valuations, so make sure these aren’t the anchor (IE: significant reduced guidancebankruptcy).
Secular Trend Stocks
Consider key secular trends such as digital transformation, cloud computing, data warehousing and analytics, artificial intelligence, electric vehicles, clean energy, and more. Look for the best-of-breed or top stocks in these trends. If the top tiers are too expensive then it’s worth going down. One important way is to find exchange-traded funds (ETFs) that specialize in these themes and then look at the weights of their positions. Make sure the ETFs have liquidity and volume, as you might even consider taking the ETF instead of a single stock. For example the First Trust Cloud Computing ETF (NASDAQ: SKYY) with 420,000 shares, volume per day is preferable to the Wedbush ETFMG Global Cloud Technology ETF (NASDAQ: IVES) with at 2,500 share volume per day. From there you can look up the possess from the First Trust Cloud Computing ETF to get ideas on which stocks to consider taking a position. The heaviest weighted holding is Pure Storage (NYSE:PSTG) with a 3.83% weighting around $26.82. It turns out that on June 1, 2022, the company had an excellent fiscal report for the first quarter of 2023. Revenue grew 50% to $630.4 million, with a record operating profit of $0.25 better than analysts’ estimates of $0.05 at $0.20. They also raised forward guidance to $2.66 billion from $2.59 by consensus analyst estimates. The company has a remaining performance obligation (RPO) of $1.4 billion, an increase of 26%, a 29% increase in subscription services revenue, a non-GAAP gross margin of 70.6% and total cash of $ 1.3 billion.
During your research, you will inevitably find stocks in secular trending sectors that are frankly cheap. Many of these stocks are below $10 or $5 for a reason, and most are unlikely to recover. However, there will be many that are worthy of a speculative position, as the percentage gains are easier to achieve with cheaper stocks. It’s also easier for a $5 stock jumping 60% to $8 than a $100 stock jumping to $160. The largest position size in the SKYY ETF turns out to be Rackspace Technology (NASDAQ:RTX) with a position of 12.7 million shares.
Once you find stocks worth holding or taking a position during a bear market. It’s time to technically analyze them in a chart. In this example, PSTG looks fundamentally solid. Now let’s look at PSTG using the gun cards on a weekly and daily timeframe provides an accurate picture of price action and determines entry levels. The downtrend in the weekly gun chart came to a halt with a flat 5-period moving average (MA) at $25.94, followed by the 15-period MA at $26.75 and 50-period MA at $27.75. The 200-period weekly MA support is priced at $20.68. The weekly lower Bollinger Bands (BBs) are at $19.18. Downtrend hit a low of $21.58 Fibonacci (fib) level. the weekly market structure layer (MSL) buy triggers when it breaks through the USD 29.17 level. Weekly stochastics are trying to bounce up through the 30 band, which is still nearly oversold. The daily gun chart is on an uptrend with a rising 5-period MA support test at $26.78 followed by the 15-period MA support at $26.05. The daily stochastic has risen towards the overbought 80-band level and is approaching the daily upper BBs at $27.87. The daily 200-period MA resistance is at $28.46. Cautious investors can patiently wait for pullbacks from the daily stochs and look for opportunistic pullback entry levels near the $25.94 fib, $24.17 fib, $23.40 fib, $22.13 fib, $20.68 fib, 19.27 fib and the $17.97 fib -level. Upward trajectories range from the $34.21 fib level to the $43.76 fib level.