Most large asset gains in bull markets occur in the early stages, in the first 12 to 18 months. However, by the time a big surge in the broad market indexes takes hold, many of the best stocks have been on the rise for weeks. The time is now, in the current bear market, to roll up our sleeves, do our homework, and follow the leaders.
How to spot leading stocks in a bear market
- 90+% of biggest winners emerge from market corrections
- Most of the best stocks bottom before the market bottoms
- Three spots to focus on: predictive, coincident, confirming
- Now in the bear market is the time to look for emerging leaders, new leadership
Over the last 140 years, the market shows that very little in the stock market is entirely new; history just keeps repeating itself. The stock market has been an effective leading indicator of the economy – both at peaks and troughs (Chart 1).
For the next part, which deals with leading stocks, we recommend our Notes From the Field on “Stock Price Maturation Cycle” and “Using accumulation and relative strength”.
After the wild ride of the most recent months, we are now looking for two key characteristics to spot new market leaders:
- Fundamentals that tell us what to buy
- Technicals that tell us when to buy
Fundamentals: Commonly, stocks that fare well during bear market corrections are in their own earnings cycle. These stocks may benefit from strong earnings and sales, new products or services, or changes in the industry that have a positive impact on the company.
Technicals: During corrections true market leading stocks exhibit strong relative price strength – they outperform. Their trend may be temporarily slowed or dampened by the weight of the bearish main trend of the general market. These stocks have lower correlation to the main index, remain resilient and quickly climb back to new highs.
In our internal work, we combine the strong fundamentals (good story) with strong technicals (good chart) and look for stocks that make their lows before the absolute bottom of the market averages. Three points to focus on: predictive (Chart 2), coincident (Chart 3), confirming (Chart 4).
A new leading subsector (predictive phase) could emerge in solar energy (second strongest subsector out of 197), as shown by Enphase’s recent earnings results (Chart 5). Other subsectors that are of interest: medical/biotech and oil & gas.
Disclaimer: No investment advice. Do your own due diligence.
“The longer the base, the higher the space”, as they say. And that just means that a long base leads to a much longer and stronger move when it does finally begin.
At Tramondo, we like to focus on bases or as we call them – box consolidations. But what is a base? Simply, it is an extended period of time where prices remain within a well-defined range with clear support and resistance levels. Whenever prices reach the upper end of a range, supply comes in the form of sellers, but when prices fall lower to the bottom of the range, demand comes in the form of buyers. This continues for a lengthier-than-average period of time until it resolves one way or the other.
These ranges can be sideways or inclined. They can come in all time frames (e.g. daily, weekly, monthly and even in intraday charts), whether you are a long-term investor or a short-term trader. Moreover, we can find them across all asset classes. The supply and demand dynamics that cause the powerful resolution remain the same.
At Tramondo, we think that a chart pattern is a visualization of the sentiment of a stock and that by observing it one can capture useful information that will provide an edge. For us technical analysis is a tool, like all others, that is useful in gaining additional information as to what the probabilities of success are in each investment. It is also an effective risk management tool that can provide signals even before the fundamentals reflect the change.
As an example, please find Tomra Systems ASA (Chart 1) for a resolution higher and Tencent (Chart 2) for a resolution lower.
