Select Page

If you own any of the big technology stocks that led the U.S. higher in the first eight months of 2018, the losses over the last six weeks sure make this feel like a bear market.

Remember that the classical definition of a bear market is a drop from the high of 20% or more.

So that the 48.5% drop in Nvidia (NVDA) from the October 1 high to the close on November 20 certainly qualifies as a bear market for that stock. Or the 41.3% decline in Advanced Micro Devices (AMD) from the September 14 high to the November 20 close. Or the 26.7% fall in Amazon (AMZN) from its September 4 high to the November 20 close. Shares of Alphabet (GOOG) are hovering just at the edge of a bear with a loss of 19.1% from the July 26 high to the November 20 close.

But the wider market has yet to enter true bear territory.

The technology heavy NASDAQ Composite Index is off 14.8%, correction territory, from its August 29 high to the November 20 close.

And the Standard & Poor’s 500 stock index is just flirting with a correction with a loss of 9.86% from the September 20 high to the November 20 close.

I can even find stocks that are up over the last month. Johnson & Johnson (JNJ) is ahead 5.32% in that period. Coco-Cola (KO) has gained 6.58%. Merck (MRK) has climbed 3.36%.

To me the big question for the market over the next few weeks or months is Does it fill that gap between the big tech sector losers and the wider indexes (let alone those few stocks that have gained on the flight to safety in this environment)?

If this market is headed for true bear market territory, it will have to fill that gap and the indexes, and all the stocks in those indexes that have held up relatively well so far, will be looking at big losses. Not as big as the worst losses in the tech sector but painfully larger than the losses now. A drop of another 10% in the S&P 500 isn’t anything I’d look forward to.

But if this market doesn’t fill the gap between the bear in those technology sector leaders and the wider indexes, then we’re not looking at a true bear market. Instead this is something else–a bear market in “over-loved” and “over-owned” technology shares such as Amazon and Apple (AAPL). A valuation correction as revenue and earnings growth rates go through a temporary slump because of saturated demand in key growth market such as smart phones or the cloud. A rotation out of risky stocks with expectations of hyper-growth into other sectors.

You can probably come up with a few more scenarios and names for a concentrated instead of market-wide bear.

The difficulty in navigating this situation is that the path to a true bear isn’t necessarily direct or immediately obvious. As with the beginning stages of the bear market that began in 2000, the market can deliver a very convincing rally before really tanking. From its high of 1464 in March 2000, the S&P 500 fell to a March 2001 low at 1139, a drop of 22.2% that moved the index into bear country. But then from March 2001 to May 2001, the index rallied, gaining 9.3%. Bear over right? No way. The bottom wouldn’t be reached until September 2002 at 827, a 43.5% total drop from the March 2000 high. Even that final drop was interrupted by a substantial rally in December 2001.

My choice for the most likely scenario here remains an end of the year rally followed by another down leg in the markets in 2019.

But that “most likely” scenario depends on big macro trends that are by no means certain. For an end of the year rally to materialize will almost certainly require at least the semblance of progress on an agreement between Presidents Trump and Xi at the Group of 20 meeting on November 30 through December 1 on an end to the U.S.-China trade war. The odds of an end of the year rally improve markedly if at its December 20 meeting the Federal Reserve sounds like it is thinking about raising interest rates two times instead of three in 2019.

For the market to drop back in 2019 and resume its path toward a true bear market we’d need renewed fears of a global economic slowdown–my most likely causal factor would be a further slowing of economic growth in China and in the world’s developing economies (quite possibly as a result of higher oil prices after an OPEC production cut.) A weaker dollar and consequently higher U.S. interest rates could also be part of the mix. More predictions of a U.S. recession in 2020 wouldn’t help.

Right now, there’s no certainty to how these macro trends will break.

Which is why in my recent Special Reports on I’ve tried to give you strategies and picks appropriate to a number of different scenarios. For an end of the year rally, for instance, I’ve suggested the IShares Russell 2000 ETF (IWM) and I’ll be posting my 10 individual stock picks for an end of the year January Effect Rally later today and tomorrow. And it’s why the Special Report before that focused on 5 picks for Protecting a Portfolio if we get a significant rally at the end of 2018 and then a continuation of the sell off in 2019. (A subscription of regularly costs $199 a year. Right now we’re offering a 20% discount for the first year. You got an email on this offer today, Tuesday. We’ll be sending a follow up email on Monday so don’t worry that you’ve missed your chance.)

And it’s why, in the next few days, I’ll be posting my picks for beaten down tech stocks that will bounce most in a rally and also my 5 picks for the safest growth stories in a market that is increasingly leery of growth stories.

I would strongly suggest that you don’t try to pursue all of these strategies at once. If you agree with my scenario, you can sequence them as I have. If you have your own preferred scenario, then you’ll have your own preferred sequence. The point is to give you the strategies and picks you’ll need no matter how–or when–this market breaks.