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September 24, 2011 - Stock Market Profit Opportunity Is Knocking - By Zacks Investment Research
By: Steve Reitmeister
On Wednesday Ben Bernanke gave the clearest signal yet that the economy is likely headed into a recession. That is when he launched the new incarnation of Operation Twist to push long term bond rates lower to encourage economic activity. Here is the key phrase from that announcement:
"Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets."
On the surface that does not sound too ominous. Yet as more investors got out their "Fed Speak Decoder Rings" they began to realize that it spells TROUBLE. That is why the Dow shed nearly 300 points in the final hours after the announcement. And Thursday brought more of the same pain.
Now more and more investors are waking up to the notion that we are likely headed into another recession. And that outcome means that stocks will head a lot lower from here.
This bear market realization prompts very different reactions from different investors. Which one best describes you?
If history holds true to form, then unfortunately most of you answered yes to #1. Meaning you are scared that the bear market will generate tremendous losses in your portfolio.
It simply doesn't have to be that way!
I want to share with you why you should be tremendously excited by the onset of a recession and bear market. That's because it offers not 1, but 2 great opportunities to profit. Let me show you how.
Opportunity #1: Profit on the Way Down
The average recession leads to a 40% decline in stock prices. The last one, as you might remember, was much worse than that. So the recent decline from Dow 12,800 is but a scratch on the surface.
So, if you are 100% sure that stocks will head lower, then the best plan of action is to:
• Sell all your stocks (yes, even the blue chips).
• Short the market with inverse ETFs to profit on the way down.
Aye, but here's the rub. We are talking about economics and the stock market. Neither is an exact science. And thus nearly impossible to be 100% sure of the outcome.
Even for as bearish as I am, I still put the odds at only about 70% likelihood of recession and bear market to follow. That 30% chance of clear sailing has me reluctant to enact the strategy above. So here is a glance at the hedged strategy I am employing in one of my portfolios:
• Half the money in ultra-safe stocks. Emphasis on large caps. Defensive industries. And big dividends. They may still go down, but by a lot less than the average stock.
• The other half in inverse/short ETFs to profit on the way down.
This hedged approach will produce profits if the market goes down or even sideways. If by chance stocks actually go higher from here, then you won't be as far behind like you would with the more aggressive all short strategy.
First, do a gut check of how sure you are of a pending market decline. Then employ the strategy that best fits what your gut is telling you.
Opportunity #2: Buying Great Companies at Great Discounts
Yes, the average stock goes down by 40% during a recessionary bear market. But some of the best growth stocks for the long haul will take even more brutal beatings of 50%, 60% even 80%.
You see, what makes these stocks so attractive during a bull market is very poisonous to them on the way down. The beauty is that once the bear market bottoms, then these same growth stocks will rise the most in the months and years ahead.
Patient investors know that this opportunity is unfolding. So about 6+ months down the road, this bear market will be ending. And then we can "back up the truck" and fill our portfolios with great companies at great discounts. Many of these stocks will rise 200%, 300% even 500% in just the first couple years after the bear ends.
So hopefully now your fears of the looming bear market are making a turn for the better as you see the wonderful investment opportunities in front of you.
Wishing you great financial success,
Steve Reitmeister has been with Zacks since 1999 and currently serves as the Executive Vice President in charge of Zacks and all of its leading products for individual investors. He is also the Editor of the new service, the Reitmeister Value Investor.
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