The Bear Case & 3 Bearish PowerRatings Stocks

As you know from my previous articles, I remain very bullish on the stock market and America, in general. However, there is a growing case for an all out bear market to rear its ugly head in the not so distant future.

What is a bear market and what factors could cause one to potentially occur this year?  By definition, a bear market is a decline of 20% or more from the market’s highs. This would mean the Dow Jones Industrials would have to drop to around 8700 for the pundits to declare the bear is back.

This is a drop of 2175 points. While this may seem like a lot, this number was gained quickly on the upside. In addition, markets generally fall faster than they climb. Even if the bear market becomes a reality, the DJIA will still be substantially off its lows at first.

We can define a pullback as anything less than 20% decline in an index and a bear market as anything over 20%. Looking technically at the daily DJIA chart, the 50-day Simple Moving Average is at 10433 and the 200-day Simple Moving Average is presently resting at 9863.49. Both these support levels are well above the definition of a bear market.

Now that a bear market has been defined, what could be the obvious causes of a sharp drop in stock prices? There are 2 obvious factors that could lead to the bear awakening from his slumber. The first is the employment situation and the second is the deficit or debt. Economists seem to be over optimistic about the job picture in America. This morning the ADP payrolls were announced and were much lower than estimated. This precursor does not bode well for the government numbers out on Friday. Jobs are the lifeblood of the economy, without a strong job market, all aspects will suffer including the stock market. 

The second factor is perhaps even more ominous is the deficit. Fed Chief, Richard Fisher recently stated, “Even under the most optimistic of scenarios, large deficits will be run for as far as the eye can see.”

Even Alan Greenspan has expressed concern over what he calls “huge overhangs of Federal debt”. This debt has led to a yield curve that is historically steep, potentially signaling more interest rate gains. An increase in rates could easily send stocks sliding.

Fortunately, short term investors don’t need to be overly concerned about the bear awakening. However, profits can be made by shorting shares ready to drop. We have developed an easy to use, 3 step process to locate these bearish companies prior to their making short term moves.

The first and most critical step is to only look at stocks trading below their 200-day Simple Moving Average. This assures that the stock isn’t in a long term uptrend that may likely continue.

The second step is to drill deeper into the list locating stocks that have climbed 5 or more days in a row, experienced 5 plus consecutive higher highs, or are up 10% or more. Yes, you heard me right, stocks that are climbing. I know this flies in the face of conventional wisdom of selling stocks as they fall further. However, our studies have clearly proven that stocks are more likely to fall in value after a period of up days than after a period of down days.

The third and final step is a combination of whittling the list down even further by looking for names whose 2-Period RSI (RSI)2 is greater than 97 (for additional information on this proven indicator click here) and the Stock PowerRating is 3 or lower.

The Stock PowerRatings are a statistically based tool that is built upon 14 years of studies into the inner nature of stock prices. It ranks stocks on a scale of 1 to 10 with one being the most volatile and most likely for short term drops and 10 proven to be the most probable for gains over the next 5 days.

The stocks that fulfill each of the above steps have proven in extensive, statistically valid studies to possess solid odds of dropping in value over the 1 day, 2 day and 1 week time frame.

Here are 3 potential bears ready to drop for your consideration:

^SA^

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^WHRT^

^CONN^

Learn more strategies for trading stocks in the short term with a free trial to our PowerRatings! The highest rated stocks have outperformed the average stock by a margin of more than 14.7 to 1 after five days! Click here to launch your free PowerRatings trial today!

The Holy Grail of Indicators – Click here to learn the best trading indicator and why you should avoid the popular 14-period RSI.

David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund.