I’ll admit I am getting apprehensive about the stock market. I’ve long been a super-bull, but the last several weeks have started to change my long-term bias. I do not like what I am witnessing on a day-to-day basis in the stock market.
Stocks are definitely showing signs of topping out. Surging volatility — fueled by trade war fears and surprise interest rate spike jitters — has investors very concerned about the future.
Despite stocks not being in an official bear market (defined as a 20% drop from the highs), price action is indicating greater bearishness may be right around the corner.
I know it may sound like an oxymoron, but during bearish periods, bullish price spikes are more common than during bull markets. The market uses these spikes to attract the last vestiges of long-only capital before a precipitous plunge. Recent price moves are indicative of this time-proven warning.
Another apparent bearish cue is the daily price range of the Dow Jones Industrial Average. The best way to illustrate the phenomenon is to take a look at the daily price chart for the DJIA.
Note the tight daily range during the move higher. The steady uptrend exhibits close daily range consistently, as price steadily moves higher. Next, as the market top was formed at the end of January, the daily range started to expand dramatically during the steady uptrend.
For those of you who are just starting out, each bar/candlestick on the daily chart represents a day and the longer the bar/candlestick, the more extensive the price range. The range expansion after the late January market top is remarkable, to say the least. The expanded daily range has stayed consistent until today pointing strongly toward dark days ahead.
How Should Investors Prepare?
The wisest move right now is to start moving your assets into stocks and other investments that have historically outperformed the market, or at the least suffered less, during bearish times.
Here are my three favorite bear market investments:
1. Duke Energy (NYSE: DUK)
Defensive utility stocks that pay a steady dividend are one way to start building your bear market moat. No matter how bad things may get, utilities are a must for our modern life.
Duke Energy is one of the largest utility companies in the United States. The company supplies and deliveries electrical power to over 7 million customers and cranks out around 53,000 megawatts of power in Florida, the Carolinas, and the Midwest. Also, Duke distributes natural gas to over a million clients and boasts a portfolio of renewable energy assets. In other words, Duke is well-diversified across products and services.
Ninety percent of Duke’s revenue is produced from regulated operations, adding to the security of the company in all market conditions.
There are three additional reasons I like Duke Energy as a bear market stock. First, the company has an aggressive renewable energy mandate, with plans to spend over a billion dollars in the next five years and ramp up revenue around 10%. Remember, Duke only produces around 3% of earnings from renewable sources. The green energy trend is just gaining strength and Duke’s participation in the trend is on a one-way ride higher.
Secondly, earnings from the natural gas business are forecasted to expand to around 15% in the next 10 years. It is not just an empty plan; Duke has stated it will spend over $6 billion to reach the goal with over $3 billion allocated to lucrative midstream endeavors.
The earnings increase will very likely lead to our third reason: dividends. Already yielding over 4%, the company has plans to achieve approximately 5% dividend growth over time. Provided the expected earnings increase, the dividend growth is likely way underestimated.
Finally, the price chart is reflecting a bounce higher from a double-bottom formation at the $75.00 per share level. Shares are lower by over 6% this year, creating an ideal bargain buy opportunity on the eve of the next bear market.
2. Consumer Staples Select SPDR Fund (NYSE: XLP)
Consumer staples are a smart place to be in the event of a bear market. Staples are must-buy items that are purchased regardless of market conditions. While it is difficult to nail down the best consumer staples company for investment, investing in the broad sector makes the most sense. The XLP ETF makes it easy to gain exposure to a broad swath of the sector. Investing in leading firms like Coca-Cola, Walmart, and Costco, the ETF is exposed to the major names in the sector.
Trading lower by nearly 7% this year and giving back close to 3% in the last 52 weeks, the ideal buy opportunity is on a breakout over $53.00 per share.
I know cash isn’t generally thought of as an investment, but when the stock market is plunging, it can be the smartest place to be. Not only does holding a substantial portion of your capital in cash protect from stock market downside but it also provides the ability to buy stocks after the carnage at bargain basement prices. Do not forget to build your cash reserves on the eve of a potential bear market!
Risks To Consider: Preparing for the likely bear market reduces your upside potential should stocks continue higher this year. When investing it is often best to not worry about the gains you’re missing out on and listen to the market.
Action To Take: Listen to what the market is saying. Start preparing for the bear market that may hit in earnest by the end of October 2018.
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